Franchising an Existing Business: A Guide to Catchment Areas and Territorial Rights
To prevent competition between franchisees, distinguish catchment areas from contractual territorial rights before recruitment begins. This practical guide covers store locations, online orders and consultation over nearby openings in Japan.
Published
When franchising an existing business, simply telling a prospective franchisee, “You will be responsible for this area”, leaves both the scope of protection and the conditions under which the franchisor may open another outlet unclear. Nearby openings that could once be managed internally across company-owned outlets become contractual issues when independent franchisees join the network. To build a sustainable franchise network, define catchment areas and territorial rights separately before recruiting franchisees.
1. Distinguish catchment analysis from contractual rights
A catchment area is the geographical area from which an outlet attracts customers or receives service orders. Territorial rights, by contrast, are rights granted to a franchisee under the contract—for example, a commitment by the franchisor not to open other outlets within a specified area. Providing a catchment map does not, in itself, clearly establish where restrictions on new openings apply.
Start by reviewing customer patterns using data from company-owned outlets. Take care when handling personal information: aggregate addresses by area, for example, when examining where customers live, visits from nearby workplaces, delivery destinations and travel times. Bear in mind that stations, rivers, major roads and competing facilities can make a location difficult to attract customers from, even if it looks close on a map.
Next, distinguish between the types of commitment the franchisor will make:
- Exclusive territory: Within the designated area, the franchisor will neither open outlets of the same brand or other categories specified in the contract nor allow other franchisees to do so.
- Prior consultation: Before pursuing a new opening nearby, the franchisor will consult the existing franchisee. Consultation must be distinguished from a right to veto the opening.
- Non-exclusive territory: No territorial exclusivity is granted. However, conditions are set for notifying franchisees of nearby openings and assessing their impact.
None of these arrangements guarantees sales. Explain territorial protection separately from forecasts of customer numbers and revenue. Stronger protection is not necessarily better: it must be balanced against the scope for opening enough outlets to meet demand across the wider area.
2. Specify boundaries and coverage using maps and schedules
Expressions such as “within walking distance of the outlet” or “around the station” invite different interpretations. Attach a territory map to the contract and identify boundaries using local administrative address units, roads or defined plots. If using a radius, specify both the starting point and how distance is measured. You should also establish whether the map or the written description takes precedence if they conflict.
Once the area is defined, clarify what the protection covers. Does it apply only to standard outlets trading under the same name, or also to smaller outlets, pop-ups and sales areas within shopping centres? Does it restrict only company-owned outlets, or also openings by other franchisees and companies affiliated with the franchisor?
In practice, a schedule covering the following points makes omissions easier to spot.
| Item | Details to agree in advance |
|---|---|
| Geographical scope | Boundaries, map version and treatment of properties on the boundary |
| Scope of protection | Brands, outlet formats and operating entities |
| Existing exceptions | Existing outlets and sufficiently developed plans for new openings |
| Protection period | Start date, duration and treatment on renewal |
| Amendment procedure | Relocation, boundary changes and how agreements will be recorded |
For example, if outlets within shopping centres are to be excluded, disclose that condition during recruitment. Explaining after the contract is signed that an outlet is exempt because it uses a different format will not resolve the mismatch with the assumptions behind the franchisee’s investment decision. Equally, exceptions that are too broad can leave the promised protection effectively meaningless.
3. Set separate rules for online orders, deliveries and corporate sales
Defining outlet locations alone will not prevent disputes over orders. With the franchisor’s online shop, booking websites, delivery services, services provided at customers’ premises and centrally agreed corporate contracts, the place where an order is received may differ from where the service is delivered.
Treat “where outlets may open”, “where sales and marketing activities may take place” and “how orders are allocated geographically” as separate questions. Will orders placed through the franchisor’s website be allocated by delivery address, or will travel time and capacity take priority? Set out exceptions for customers who request a particular outlet and cases where the assigned outlet is closed.
For a service delivered at customers’ premises, for example, the responsible outlet could normally be selected by the service address. If it has no available appointments, the booking could be transferred to a nearby outlet with the customer’s agreement. This requires rules on who approves the transfer, who contacts the customer, who receives payment and who handles complaints.
An unsolicited enquiry from a customer outside the territory is not the same as advertising targeted at another outlet’s assigned area. Specify the activities subject to restrictions, such as location-based advertising, leaflet distribution and sales visits to corporate customers. However, restrictions on franchisees’ customers or sales activities may require review under Japan’s Antimonopoly Act, depending on their terms and their effect on competition. Territorial protection does not, by itself, justify every restriction.
4. Check that commitments are consistent with Japanese law
Japan has neither a single comprehensive franchise-specific law covering all franchises nor a general registration system for franchisors. There are, however, statutory rules governing certain transactions within franchise networks.
Article 11 of the Small and Medium-sized Retail Business Promotion Act requires franchisors that qualify as operators of a “specified chain business” under the Act to provide prospective franchisees with written disclosures and explanations before contracting. Whether a business qualifies depends on criteria including whether it primarily serves small and medium-sized retailers, uses standardised contracts, provides ongoing supplies of goods or arranges their sale, offers management guidance, permits the use of trade marks and collects payments on joining. Do not assume that every retail or food-service franchise necessarily falls within this category.
Where the Act applies, the required disclosures include whether the agreement contains provisions allowing the franchisor to operate, or permit others to operate, identical or similar outlets near the franchisee, and what those provisions say. Use terms such as “exclusive”, “priority” and “protection” consistently across the contract, territory map and recruitment materials.
The franchisor and franchisee are also independent businesses, and their commercial relationship is subject to the Antimonopoly Act. The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act explain how the Act applies to franchise recruitment and dealings after a contract is signed. Potential issues include recruitment practices that conceal the possibility of nearby openings and make the terms appear substantially more favourable than they are, or the use of a superior bargaining position to impose unjustified disadvantages.
The Civil Code is also relevant to the interpretation and breach of territorial agreements. Even where a franchise does not qualify as a specified chain business, important conditions concerning territorial protection should not be left vague. Have specific clauses and restrictions on sales activities reviewed by a lawyer familiar with franchise agreements in Japan.
5. Put nearby-opening assessments and consultation into practice
Even if the contract permits a new opening, proceeding without assessing its impact on franchisees can damage trust. Before committing to a new site, establish an internal process to examine customer overlap with existing outlets, delivery areas, the impact on recruitment and local demand. Involving franchise support staff, rather than leaving the decision solely to the development team, can help.
The process can follow this sequence: impact assessment, review of contractual conditions, explanation to the franchisee, recording of consultations and internal approval. Notification deadlines and consultation methods must match the contractual commitments. Do not confuse cases where notice from the franchisor is sufficient with those requiring the franchisee’s consent.
If existing franchisees are to be offered the first opportunity to open additional outlets, specify response deadlines, how their operating capacity will be assessed and what happens if they decline. Likewise, if population shifts or new shopping centres could prompt a territory review, explain the conditions for consultation from the outset. Avoid arrangements that allow the franchisor to redraw protected areas solely for its own convenience, and record both the reasons for changes and the agreement reached.
Practical takeaway: Before recruiting franchisees, bring together the territory map, a schedule of what is protected, rules for allocating online orders and the consultation procedure for nearby openings. Clearly defining not just “which area you will manage”, but also “what we protect and what we do not promise”, lays the foundations for a franchise network rooted in its local markets.
