Buying a franchise: check your territorial exclusivity

When you buy a franchise, you join a network, but you also run your own business and bear your own financial risk. You therefore need to know whether others in the same chain can compete for customers near you. An allocated territory is not necessarily a protected territory. Here is how to check what a promise of exclusivity actually means before you sign.

1. Distinguish between an operating territory and exclusive rights

Start by finding the agreement’s provisions on territory, opening outlets, sales areas and exclusivity. Read them alongside any maps and appendices. A clause stating that you must operate within a particular municipality may restrict where you can work without preventing the franchisor from opening another outlet there.

Ask the franchisor to specify exactly which rights you will receive:

• Location rights: Where can you base your business?
• Territorial protection: Does the franchisor undertake not to open its own outlets, or allow other franchisees to open outlets, within the territory?
• Sales rights: Which customers, services and sales channels do your rights cover?
• Priority rights: Do you merely have the opportunity to discuss a new outlet first, or a binding right to open it on specified terms?

These terms are not interchangeable. Priority over the next outlet, for example, does not provide the same security as a ban on competing outlets.

If the boundary is defined by postcodes, municipal boundaries or a distance from your premises, the agreement also needs to address changes. Ask for a dated map and a clear rule stating which description takes precedence if the map and the agreement’s wording differ. Also check what happens to your protection if you have to relocate.

2. Identify the exceptions, particularly online sales

Exclusive rights can be much narrower than they sound. Protection may apply to a particular type of physical outlet, while the franchisor retains the right to sell online, operate temporary sales outlets or enter into contracts with major customers.

Ask for a consolidated list of exceptions. In particular, ask whether the franchisor or others in the network can:

• sell through a website or app to customers in your territory,
• deliver from an outlet outside the territory,
• serve national business customers with local sites,
• open smaller sales outlets within other businesses,
• offer parts of the franchise’s product or service range through other channels.

Then test the terms against specific scenarios. A customer lives in your territory but orders through the chain’s website. Another contacts a neighbouring outlet. A company headquartered elsewhere wants work carried out near you. Who can accept the job, who must carry it out, and does your business receive any compensation?

Also distinguish between protection against new outlets and entitlement to customer enquiries. A ban on new shops opening nearby does not automatically mean that the chain’s central booking system must direct local enquiries to you. If these enquiries are important to your financial projections, the allocation rules should be clear and binding.

3. Check when protection can change or end

Check whether exclusivity applies throughout the agreement’s term or only for an initial period. Find out whether the franchisor can reduce your territory as the population grows, when a new sales channel is introduced or following its own assessment of market potential.

If protection depends on your performance, the conditions need to be measurable. Ask what requirements apply, how performance is measured, when it is assessed and whether you have an opportunity to remedy a shortfall before your protection changes. Wording such as “adequate market coverage” otherwise leaves considerable room for interpretation.

Next, carry out a simple financial stress test. Assume that a permitted new sales channel or a nearby outlet takes a share of demand. Use your own clearly labelled assumptions and calculate how far sales could fall before the business no longer covers its costs.

The aim is not to predict competition precisely. It is to establish how much your purchase depends on protection that the agreement may not provide. Also ask about planned outlets that could affect the rights you are being offered.

4. Understand the legal context of territorial protection

Sweden has an Act on Franchisors’ Duty to Provide Information (2006:484). It requires franchisors to provide clear, understandable written information, well before the agreement is entered into, about its implications and any other matters necessary in the circumstances. You should therefore ask for the scope of territorial protection, its exceptions and the conditions for changing it to be explained before signing.

The Act does not, however, automatically grant exclusive rights. Your protection needs to be set out in the agreement. General contract law, including the Swedish Contracts Act, is also relevant when assessing the terms.

Restrictions on territories and sales to customers must also be assessed under the Swedish Competition Act and, where applicable, EU competition rules. The distinction between actively selling into a territory and responding to unsolicited customer enquiries can be crucial. Do not assume that an absolute ban on all sales across territorial boundaries is lawful. Have a lawyer with relevant expertise review the arrangement.

Practical takeaway: Do not sign until you can identify the territory, describe exactly what the exclusive rights protect and explain all the significant exceptions. Base your calculations on the rights the agreement actually gives you — not on the word “exclusive”.