Buying a franchise: check your territorial protection

An attractive location is worth less if another outlet under the same franchise brand can open nearby. If you are buying a franchise, you therefore need to know exactly what territorial protection the contract provides. Local franchisees and central sales channels can support one another, but clear agreements are essential. Check not only where you may operate, but also who else may serve customers in that territory.

1. Distinguish between an operating territory and exclusivity

A territory defined in your contract is not necessarily exclusive. The agreement may simply specify where you may open your outlet or offer services, without restricting the franchisor from opening other locations.

Ask what the wording means in practice. Terms such as ‘your own region’, ‘catchment area’ and ‘protected location’ are not enough unless the associated rights are clearly defined.

Check at least the following:

• Boundaries: are postcodes, municipal boundaries or a map included in a schedule to the contract?
• Protected activities: does the agreement cover all products and services, or only some?
• Parties bound by the restrictions: do the restrictions apply both to the franchisor’s own outlets and to other franchisees?
• Exceptions: could temporary sales outlets, collection points or outlets within other businesses be opened, for example?
• Duration: does the protection remain in place throughout the term of the agreement?

Consider changes to the surrounding area too. A territory based on municipal boundaries may raise questions if municipalities are reorganised. Have the agreement specify which boundaries will continue to apply in that situation. A dated map with clear boundaries helps prevent the parties from interpreting the territory differently later on.

2. Understand what the Dutch Franchise Act does and does not protect

The Netherlands has specific franchise legislation: the Dutch Franchise Act (Wet franchise), incorporated into Articles 7:911 to 7:922 of the Dutch Civil Code. These rules do not automatically give you an exclusive territory. Territorial protection must therefore be established in your agreement.

The law does require the franchisor to provide information before the agreement is signed. This includes the draft agreement and its schedules, along with other information that the franchisor knows, or should reasonably suspect, is important to your decision. Firm plans for a nearby outlet or a competing sales channel may therefore be relevant. Ask about these explicitly.

Also ask about other franchisees’ existing rights. A promise about your territory offers little reassurance if another operator already holds overlapping rights. Ask the franchisor to explain in writing how any overlap will be resolved.

Competition law also matters. Agreements governing where businesses may sell and to whom are subject to limits. Restrictions on online sales and on sales made in response to unsolicited customer enquiries, in particular, require specialist assessment. Ask a franchise lawyer to check not only whether your protection is clear, but also whether the arrangements are legally enforceable.

3. Investigate online sales and other exceptions

Territorial protection covering only physical shops may be narrower than you expect. The franchisor might, for example, serve customers in your postcode areas through a central online shop. Corporate framework agreements, delivery platforms and mobile services may also generate sales within your territory without a new outlet opening there.

For each sales channel, clarify who receives the order, who fulfils it, who receives the revenue and who bears the costs. For example, ask:

• Will you receive a payment for online orders from your territory?
• Must you deliver, install or accept returns of products sold centrally?
• Who pays the associated labour and transport costs?
• Are national corporate accounts excluded from your protection?
• What arrangements apply when customers choose to use another outlet?

Do not settle for an explanation that online sales are ‘good for the brand’. That may be true, but it says nothing about the effect on your local business’s profitability. Ask your accountant to model the financial impact of the contractual allocation of revenue and work.

Also assess whether exceptions have clear limits. An exception for one existing sales outlet is easier to assess than a general right to introduce new sales formats anywhere. Ask for a complete list of existing exceptions and a clear procedure for handling new situations.

4. Agree conditions and remedies in advance

Exclusivity sometimes depends on minimum turnover, opening hours or other performance requirements. If so, examine not only the target but also how it is measured. Does revenue booked centrally count? What happens during prolonged roadworks or supply problems for which you are not responsible?

Where possible, negotiate a warning and a reasonable period to remedy any shortfall before protection is withdrawn. Also specify whether the territory can be reduced and what objective criteria would govern that decision. Avoid arrangements in which an important right depends solely on an undefined judgement by the franchisor.

Finally, discuss what happens if there is a suspected breach. Who investigates the complaint, what information will you receive and how soon must discussions take place? Seek legal advice on what remedies or compensation might be appropriate if the agreement is breached; do not assume that compensation is automatic.

Practical conclusion: sign only when you can identify, on a single map and in the agreement, where your protection applies, which sales channels it covers and what exceptions are possible. A clearly defined right is worth more than a sweeping verbal promise.