Franchising an Existing Business: Designing Territory Rights and Rules for Nearby Openings

When turning an existing business into a franchise, simply telling your first franchisee, “This area is yours”, is not enough. The meaning of that promise depends on whether it covers premises, deliveries, online sales or all three. To build a franchise community in which franchisor and franchisees can work together over the long term, define territory rights and rules for nearby openings before recruiting franchisees.

1. Distinguish between a catchment area and territory rights

A catchment area is the area from which customers are expected to visit a business or use its services. Territory rights, by contrast, are rights granted to a franchisee by contract in relation to a defined area. Keep the two distinct: providing a catchment analysis map should not be treated as granting exclusive trading rights.

Start by deciding which of the following approaches to adopt.

• Grant an exclusive territory: Do not allow company-owned outlets or other franchisees’ outlets to open within the designated area.
• Offer priority consideration: When planning an additional outlet, ask the existing franchisee first whether they are interested. Distinguish this from a guaranteed right to open the outlet.
• Do not grant an exclusive territory: Make clear that additional outlets may open nearby, and establish procedures for assessing proposals and communicating decisions.

These are examples of possible arrangements, not categories prescribed uniformly by law. Rather than relying on vague labels such as “designated area” or “priority zone”, set out what the franchisor must refrain from doing and what it promises the franchisee.

Even an exclusive territory does not guarantee customer numbers or sales. Explain that protection extends only to the activities specified in the contract: it cannot prevent competitors from opening or changes in the local population.

2. Define geographical boundaries alongside sales channels

Combining an address list with a map attached to the contract makes the territory easier to identify. If stations, rivers or roads form the boundaries, specify whether both sides of a road are included and how premises on the boundary will be treated. Date and version the map, and state which takes precedence if it conflicts with the address list.

Data collected from company-owned outlets—such as where customers travel from, delivery destinations and journey times—can inform the design. However, avoid applying the same radius to a city-centre catchment served on foot and a regional catchment where customers drive. Nor must a catchment that works for an existing outlet automatically become the exclusive territory for an outlet elsewhere.

Next, address transactions that cannot be allocated by a map alone.

Activity	What to decide before signing the contract
Standard outlets	Whether company-owned and franchised outlets are subject to the same opening restrictions
Online sales	Whether the franchisor may sell directly to customers within the territory
Delivery and on-site services	Whether the territory is determined by the outlet’s location or the place where the service is provided
Events and temporary outlets	Whether these are treated like standard openings or subject to conditions such as a time limit
Centralised corporate contracts	Who will handle work within the territory after the franchisor secures the contract

For example, you could restrict standard outlet openings while permitting the franchisor’s online sales. In that case, allocate responsibility not only for taking orders but also for delivery, returns and customer service. If the local franchisee is expected to carry out work, clarify payment and cost allocation separately rather than assuming they will do it free of charge.

3. Check Japanese disclosure requirements and competition law

Japan has no single dedicated law comprehensively governing all franchise agreements, nor a franchise-specific registration system that applies uniformly to franchisors and franchisees. That does not mean franchising is unregulated. Agreements are subject to the Civil Code and other legislation, and territory arrangements require consideration of the Act on the Promotion of Small and Medium-sized Retail Business and the Antimonopoly Act.

Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors operating a qualifying “specified chain business” to provide written disclosure and explanations before a contract is concluded. Broadly, this covers arrangements aimed primarily at small and medium-sized retailers that provide ongoing supplies of goods, or arrange such supplies, alongside management guidance under standardised contracts, and include provisions for the use of specified branding and payments on joining. Whether an arrangement qualifies depends on the actual contract and business activities, not simply on whether it is labelled retail or food service.

Japan’s Small and Medium Enterprise Agency lists the existence or absence of territory rights among the main pre-contract disclosure items. Franchisors within scope must therefore explain clearly whether territorial protection is provided, in line with the specific terms of the agreement.

The Japan Fair Trade Commission’s Guidelines Concerning the Franchise System under the Antimonopoly Act also apply to franchises outside retail and food service. Territorial restrictions are not automatically unlawful. However, restrictions that unfairly constrain franchisees beyond what is necessary may raise concerns about trading on restrictive terms or other competition issues. Where a franchisor uses a superior bargaining position to impose unfair disadvantages, abuse of a superior bargaining position may also need to be considered.

A promise by the franchisor not to open nearby is distinct from a prohibition on the franchisee trading outside its territory. If you intend to impose broad restrictions—particularly a ban on selling to customers who independently visit from outside the territory—review their necessity and scope with a qualified adviser.

4. Establish internal reviews and advance communication for nearby openings

Even where no exclusive territory is granted, a clause stating that “the franchisor may open outlets freely” should not be the end of the process. When explaining the arrangement to franchisees, disclose the possibility of nearby openings and the criteria for assessing them. Apply those criteria when reviewing proposed openings.

Internal applications for a new outlet should include, at a minimum:

• The proposed premises’ location in relation to existing franchisees’ contractual territories
• Overlap in customer groups, times of use, delivery destinations and similar factors
• An assessment of the impact on existing outlets and the additional demand the new outlet could attract
• When existing franchisees will be contacted, what they will be told and who is responsible
• How the impact will be monitored after opening

The impact assessment should not be a box-ticking exercise designed to justify an opening. Record uncertainties where data is insufficient, and revise the plan or conduct further research where necessary. Avoid categorical claims that sales will not be affected, and do not allow staff to make verbal promises of compensation that is not provided for in the contract.

Also clarify the purpose and status of communication. “Notification”, “consultation” and “obtaining consent” give franchisees different levels of authority. If an existing franchisee is offered priority consideration, set a response deadline, specify the financial and operational checks required, and explain what happens if agreement cannot be reached.

5. Test boundary cases before recruitment begins

Do not review the completed proposal solely by reading the contract: test it against concrete scenarios. Check whether sales staff and outlet development staff reach the same conclusions in cases such as “opening a company-owned outlet just across the boundary”, “the franchisor securing a centralised contract with a company inside the territory”, or “a franchisee relocating into a neighbouring territory”.

Different interpretations indicate gaps in either the explanation or the design. Record the answers in the operations manual, and appoint someone to manage territory maps, lists of exceptions and outlet-opening review records. However, do not narrow contractual rights merely by adding wording to the manual. Where changes are needed, check the contractual procedures and whether agreement is required.

Practical takeaway: Before recruiting franchisees, summarise “which area is protected”, “what is protected” and “how additional openings will be assessed” in three documents: a territory map, a sales-channel schedule and an outlet-opening assessment form. Clear arrangements that do not depend on staff members’ verbal promises help sustain trust across the franchise community.