Franchise Territory: Boundaries to Clarify

Before franchising your existing business, you need to be clear about where each franchisee may operate and what protection they will receive. A promise that “you’ll be the only one in the area” is not enough. Shops, delivery services and online sales can all serve the same customers. Clear territorial rules help franchise networks avoid promises they cannot keep and disputes that disrupt operations.

1. Define the rights being granted

Permission to operate at a particular location is different from exclusive rights within an area. A shop may be approved for one building without any promise that another outlet will not open in the building next door. If an exclusive territory is offered, specify whose activities it restricts and which activities are covered.

Before making an offer, answer the following questions:

• Can the brand owner open a company-owned outlet within the area?
• Can another franchisee be appointed there?
• Are pop-up premises, mobile shops and sales at events covered?
• Are deliveries and online transactions included?
• Are separate rights reserved for airports, schools or large institutions?

State any exclusions explicitly. For example, if the brand owner retains sales to national corporate customers, applicants should not be led to believe that every transaction within the area will automatically go to them.

2. Use boundaries that can be measured and checked

Avoid relying on terms such as “nearby”, “surrounding area” or “primary market”. Attach a map and a written description of the territory. You can use streets, barangay boundaries—the boundaries of local administrative units in the Philippines—or a specified distance from an agreed point.

If distance is the basis, clarify whether it means a straight-line measurement on a map or the distance travelled by road. If administrative boundaries are used, identify the map and date on which they are based and explain how boundary changes will be handled. Also specify which takes precedence if the map and written description do not match.

Do not choose a territory’s size simply because it makes the offer attractive. Use records from the existing business to assess where customers come from, how far deliveries can realistically reach and where outlets’ catchment areas overlap. A large territory does not guarantee sufficient sales.

Test the proposed boundaries against several scenarios: a customer across the road, a building with entrances in two barangays, and a new shopping centre at the edge of the area. If the answers are unclear, refine the rules before offering the territory.

3. Separate outlet location from sales allocation

Shopping habits do not always follow boundaries on a map. Customers may visit another outlet, order through the brand’s central website or use a third-party delivery platform. Rules on where outlets may open therefore need to be separate from rules on allocating enquiries or orders.

For centrally received orders, choose a clear basis for allocation: the recipient’s address, the nearest outlet, the ability to fulfil the order or the customer’s chosen shop. Specify who collects payment, handles complaints and bears delivery or return costs.

Also establish rules for situations where the assigned outlet is temporarily unable to provide the service. Transferring an order to another outlet should not automatically mean a permanent change to the territory.

Distinguish between customers choosing to visit an outlet and an outlet actively advertising in another franchisee’s territory. Have any restrictions legally reviewed before implementing them; not every sales restriction is permissible simply because it appears in a contract.

4. Review legality and the process for changes

The Philippines has no single comprehensive franchise law. That does not mean franchising is unregulated. Under Article 1306 of the Civil Code, parties may agree contractual terms provided these do not contravene the law, morals, good customs, public order or public policy.

Exclusive territories are generally permitted, but competition law, including Republic Act No. 10667, must be considered. Republic Act No. 8293, the Intellectual Property Code, is also relevant: agreements that qualify as technology transfer arrangements must be reviewed against the prohibited clauses in Section 87 and the mandatory provisions in Section 88.

For agreements covered by Executive Order No. 169, which aims to protect micro, small and medium-sized enterprises in the franchise sector, it is important to clearly define the rights granted and the parties’ obligations. The order does not automatically give every franchisee an exclusive territory.

Set out the process for any changes in the agreement, including the grounds, notice, review and consent required. Avoid promising exclusivity while retaining a vaguely worded power to withdraw it at any time.

Practical summary: Before accepting payment, prepare the territory map, the scope of the rights granted, any exclusions and the rules for allocating orders. Have these reviewed alongside the contract so that everyone understands what is protected—and what is not.