Planning Territories Before Franchising: Protections to Include in Your First Agreement

When turning an existing business into a franchise, it is easy to choose the location of the first franchise outlet and leave its territory to be decided later. Yet as soon as a second outlet is proposed nearby, the franchisor’s expansion plans can clash with the first franchisee’s expectations. To maintain trust across the franchise network, you need to explain the area you will protect, the activities permitted and the procedure for making changes from the recruitment stage onwards. This article focuses on how to define territories through maps and written documents before signing your first agreement.

1. Distinguish territory protection from a sales guarantee

South Korea has dedicated legislation governing franchising: the Fair Transactions in Franchise Business Act, referred to here as the Franchise Act. Article 12-4 requires franchisors to establish a franchisee’s territory when entering into an agreement and to specify it in the franchise agreement. Territory arrangements therefore cannot be left to a representative’s verbal assurances or an internal policy on new outlets.

During the agreement’s term, the franchisor must also not, without justifiable grounds, establish a company-operated or franchised outlet belonging to itself or an affiliated company in the same line of business within that territory. Do not assume that using a different brand name gives you unrestricted freedom to open an outlet. Whether the business is in the same line of business, whether the company is an affiliate and whether justifiable grounds exist must be assessed against the actual business structure and applicable legislation.

Crucially, territory protection is not a guarantee of a particular level of sales or profit. It concerns the legal and contractual limits on the opening of outlets by the franchisor and its affiliates. It does not prevent competing brands from entering the area or customers from shopping elsewhere. In materials used for discussions with prospective franchisees, set out separately what is protected and what is not guaranteed. If you provide estimates of customer numbers or catchment-area analysis, explain their basis and limitations as well.

In practice, it is useful to document ‘protection required by law’ and ‘additional support promised by the franchisor’ as separate items. For example, a promise of local marketing support should not be presented as securing exclusive access to customers. This distinction helps franchisees assess the value of the agreement realistically.

2. Create a map with clear boundaries, rather than relying on a radius

There is no single approach to territory size that suits every brand. Customer travel patterns vary depending on whether the business mainly serves walk-in customers, provides appointment-based services or relies heavily on delivery. Use order data and information about how customers reach your existing outlet, but do not assume that the same patterns will be replicated at a new location. Brand recognition or convenient parking specific to your flagship outlet may influence the results.

Start by marking roads, railways, rivers and major facilities around the proposed outlet that affect customer access. Places that look close on a map may belong to separate catchment areas if a road is difficult to cross. Conversely, underground station entrances or pedestrian routes may connect customers across administrative boundaries. A map that explains why particular boundaries were chosen is more useful than a simple circle.

Include the following in the map attached to the agreement:

• The outlet’s address and the date the map was prepared.
• The names and precise stretches of roads that form the boundaries.
• An explanation of whether buildings on the boundary are included.
• Clear treatment of large commercial complexes and underground shopping centres.
• A procedure for resolving discrepancies between the map and the address list.

For example, ‘the shopping area around the station’ can mean different things to different people. Specify whether it means the area between particular entrances, the area enclosed by certain roads or the inside of the station building as well. Identify the map as an annex linked to the agreement, and keep a record confirming that both parties received the same document. Once it is ready, ask an employee unfamiliar with outlet development to decide whether buildings at the boundary fall within the territory. If interpretations differ, the explanation needs refining.

3. Explain delivery areas and special-site outlets separately

The contractual territory, the delivery area and the area in which advertising is displayed are distinct concepts. Delivery-platform settings and customers’ choice of outlet can cause two outlets’ order areas to overlap. This does not remove the duty to protect the territory, but nor does it mean that every online order within the mapped area automatically belongs to one outlet.

If the franchisor operates its own channel for allocating orders, establish the allocation rules first. Explain whether customers choose an outlet themselves, whether orders are routed by delivery address and whether an order is passed to another outlet if the original outlet cannot fulfil it. Also distinguish between matters determined by the platform and those the franchisor can control. Avoid promising exclusivity over order flows you cannot control.

Your delivery operating plan should answer the following questions:

• How is an order handled if a customer chooses a neighbouring outlet?
• Which outlet responds when delivery is unavailable or an outlet is temporarily closed?
• Who sets the geographical reach of local advertising?
• What records are used to investigate a disputed order allocation?

Do not overlook outlets in special locations, such as department stores, hospitals or station buildings. Their customers may differ from those of ordinary high-street outlets, but do not assume that a blanket clause excluding all ‘special trading locations’ allows you to avoid statutory obligations. Review the actual location, operating format and potential customer overlap, and check that any exception clause is lawful. Rather than broadly reserving rights for formats you have no current plans to introduce, specify the arrangements you can explain at present.

4. Document the review process for new outlets and territory changes

Territory planning does not end when the first agreement is drafted. Every proposed new outlet needs a review of the protections in existing agreements. Keep each outlet’s agreement, attached map and records of discussions together so that the same standards can be applied even when staff change or an affiliated company proposes a new opening.

The review record for a proposed outlet should include its address, its relationship to existing outlets, whether it falls within a protected territory, any additional contractual commitments and whether legal review is needed. Rather than stopping once you have confirmed that the site is outside an existing territory, also check for overlap in delivery orders and local marketing. This is not about arbitrarily extending statutory protection. It is a management process for identifying and explaining potential conflicts within the franchise network early.

Nor should the franchisor unilaterally redraw boundaries when changing a territory at renewal. The Franchise Act allows reasonable adjustments by agreement with the franchisee where grounds specified by Presidential Decree arise, such as a significant and rapid change in the local trading area. Do not assume that higher outlet-opening targets alone justify a change. Record the reasons for the change, supporting evidence, discussions and the resulting agreement.

Before signing the final agreement, check that the territory descriptions are consistent across the contract, the relevant entries in the franchise disclosure document and recruitment materials. Registration of the disclosure document does not guarantee that individual contractual clauses are lawful. Check the commencement dates and amendment status of the applicable legislation, and have boundary exceptions or variation clauses reviewed by a qualified franchise transaction specialist (a regulated professional in South Korea) or a lawyer.

Action summary: Before recruiting your first franchisee, prepare a territory map, a one-page explanation of the scope of protection and a review form for proposed new outlets. Ensuring that everyone understands the same boundaries and procedures matters more than promising a large territory.