Buying a franchise: check territorial exclusivity

The promise that you will be the ‘only partner in the region’ can strongly influence your decision to buy a franchise. Yet it does not tell you whether the franchisor may open its own outlet there, sell online or supply major customers directly. Before joining a franchise network, check what territorial protection actually covers. Its value lies not in the word ‘exclusive’, but in clearly defined rights, exceptions and consequences of a breach.

1. Define the territory so its boundaries can be verified

First, distinguish between permission to operate at a particular location and a promise that there will be no other outlets of the same brand within a particular territory. The agreement may specify your outlet’s address without granting you any territorial exclusivity.

Ask for a schedule to the agreement containing a map and a description of the boundaries. Terms such as ‘Ljubljana and the surrounding area’, ‘central Slovenia’ or ‘the wider city area’ are open to different interpretations. Clearly specified municipalities, settlements or other unambiguous boundaries are more useful. If the territory is defined by a radius, the agreement must make clear the point from which it is measured and the method used.

Also check whether the franchisor reserves the right to change the boundaries. How changes to postcodes, municipal boundaries or your outlet’s location will be handled should be agreed in advance.

Before signing, answer three questions:

• Does the territory in which you have the right to operate match the territory for which the franchisor promises protection?
• Does protection begin on signing, on opening or at another specified point?
• Are the map and the wording consistent, including at the edges of the territory?

If a neighbouring outlet has already been approved, or an agreement to open one is in place, ask how this will affect your protection.

2. Break down the exceptions by sales channel

Territorial exclusivity may apply only to new conventional outlets. Other sales locations and ordering methods may be excluded. Ask for an overview of every channel through which the same brand can reach customers in your territory.

In particular, check:

• the franchisor’s own outlets and those operated by affiliated companies;
• the online shop, app and delivery platforms;
• temporary outlets, stalls and mobile units;
• sales in shopping centres or within other shops;
• direct contracts with large businesses and other key accounts.

For each exception, ask who receives the revenue, who provides the service and who bears the costs. If head office receives an online order but you have to prepare the goods, deliver them or handle a return, payment for your work should be expressly covered by the agreement. The customer’s location alone does not mean you are entitled to the revenue.

Test the agreement with a specific example: a customer in your territory places an order through the app, but a neighbouring outlet fulfils it. Is this permitted? Are you entitled to any payment? The answer must come from the agreement, not merely from a sales representative’s verbal explanation.

3. Check the conditions under which protection ends

Protection may depend on achieving a minimum turnover, opening an additional outlet or meeting other performance requirements. This is not the same as unconditional exclusivity. Before signing, check the performance measure, the assessment period and the data source.

For a turnover target, clarify how returns, discounts, value added tax (VAT) and online sales are treated. If the franchisor retains some sales in your territory, check whether those sales count towards your performance assessment. Otherwise, you may be held responsible for a target over which you do not have full control.

Also ask exactly what happens if you miss a target. Will the territory shrink, will protection be removed, or will the franchisor gain the right to open another outlet? Does the change take effect automatically or following notice? Agree a process for checking the data and an opportunity to respond before any change takes effect.

Prepare a financial plan for a scenario in which an additional sales channel for the same brand legitimately operates in your territory. Do not simply guess the percentage of sales you might lose: set out your assumptions and assess how much of a revenue reduction your outlet can withstand. Be particularly cautious if you are paying an additional fee for exclusivity but the agreement allows the franchisor to limit it unilaterally without clear consequences.

4. Check protection under Slovenia’s legal framework

Slovenia has no specific franchising act, compulsory franchise register or specific statutory pre-contractual disclosure document. Territorial exclusivity is therefore not an automatic right acquired simply by buying a franchise.

A franchise agreement is an innominate contract, meaning it is not a specifically regulated contract type. The general rules of the Slovenian Obligations Code (OZ), including the principle of good faith and fair dealing, are relevant to its interpretation, performance and the consequences of a breach. Make sure the promise of a protected territory is included in the agreement itself, and retain written explanations of its scope.

Slovenian competition law and, where relevant, EU competition law must also be considered. Not all restrictions on sales between territories are permissible to the same extent; the distinction between actively soliciting customers and responding to unsolicited enquiries is particularly important. Do not assume that an agreement can simply prohibit other franchisees from making any sales to customers in your territory. Have the specific arrangement reviewed by a lawyer familiar with competition law.

The agreement should also specify how encroachment on a protected territory will be handled and what contractual remedies are available. Do not assume that an alleged breach will automatically entitle you to stop paying franchise fees.

Practical takeaway: before signing, obtain a map, a list of exceptions and clear conditions for losing protection. Assess the value of exclusivity only once you understand who can sell in the same territory, who receives the revenue and what happens if the agreement is breached.