Buying a franchise: check territorial protection and rights to customers

A well-known brand can attract customers, but it does not tell you which sales will actually go to your business. When you buy a franchise, you join a network of independent business owners. You therefore need to understand how customers, outlets and sales channels are allocated. Here is a practical approach to reviewing territorial protection before you commit.

1. Find out what the territory actually protects

A territory marked on a presentation map is not the same as a contractual exclusive right. Terms such as ‘exclusive territory’, ‘primary catchment area’ and ‘development area’ can describe very different rights. Start by asking the franchisor to specify exactly which rights you receive and which it retains.

In particular, distinguish between three things:

• Protection against new outlets: restrictions on opening other outlets within the territory.
• Sales rights: which customers and geographical areas you may target.
• Allocation of business: who receives the revenue when a customer comes through a shared channel.

Protection against new physical outlets does not necessarily prevent the franchisor from selling directly to the same customers online. Nor does an allocated territory necessarily mean that all enquiries from that area will be passed to you.

Ask for a dated schedule to the agreement containing a map and clear boundaries, such as postcodes or municipal boundaries. Check which description takes precedence if the map and the text differ. Also ask whether the protection covers both other franchisees and the franchisor’s own outlets.

Then ask the franchisor to walk you through a specific example: if a new customer within the territory contacts the network’s head office, who provides the quotation, enters into the customer contract and issues the invoice? The answer often reveals more than the word ‘exclusive’.

2. Map out online sales and shared customers

A customer’s route to a purchase rarely follows a simple geographical boundary. A customer may see centrally managed advertising, order through an app and collect the product from you. For services, head office may sign a nationwide contract while you carry out the work locally.

Ask for written rules covering every sales channel that matters to the franchise model:

• The network’s website, app and central booking system.
• Telephone enquiries and centrally allocated leads.
• National corporate contracts and public procurement.
• Home delivery, collection and sales through third-party platforms.

For each channel, you need to know who is responsible for the sale, who carries out the work and how payment is calculated. Also check who bears the cost of local customer service, complaints and refunds. Otherwise, a seemingly attractive sales channel could create work without a corresponding income.

Find out what information you can access to monitor how business is allocated. Can you see orders delivered within your territory but invoiced centrally? Can an incorrectly allocated lead be reassigned?

Customer data is not something anyone simply ‘owns’ and can use freely. The agreement should clarify access and responsibilities, while the processing of personal data must comply with the General Data Protection Regulation, or GDPR. A commercial right to a customer relationship does not automatically give you unrestricted rights to use that customer’s personal data.

3. Use your right to information before signing

In Sweden, the Act on Franchisors’ Duty to Disclose Information (2006:484) applies. Well before the agreement is entered into, the franchisor must provide clear, understandable written information about what the agreement entails and any other matters needed in the circumstances.

The minimum requirements include a description of the business, information about other franchisees in the same franchise system and the scale of their operations, financial terms and the intellectual property rights being licensed. Verksamt, Sweden’s official business information portal, also explains this pre-contractual disclosure obligation.

However, the Act does not automatically grant an exclusive geographical territory. Nor does it prescribe a general, fixed disclosure period expressed as a number of days. You need to receive the documents early enough for a meaningful review and secure the protection you need in the agreement.

Request the draft agreement, territory schedule and customer allocation rules at the same time. Also ask for details of existing outlets and any plans for new outlets nearby. Distinguish between confirmed openings, preliminary plans and matters on which the franchisor has not yet made a decision.

Sweden has no comprehensive franchise law governing all contractual terms. The Swedish Contracts Act and competition rules may also be relevant. Restrictions on targeting customers, online sales and sales across territorial boundaries require a competition law assessment. Do not assume that a blanket ban on sales outside the territory is lawful simply because both parties agree to it.

4. Test the protection against future changes and your financial projections

Territorial protection may depend on achieving a certain turnover, maintaining opening hours or meeting other performance requirements. Do not just read the clause granting you the territory: also read the terms that allow it to be changed.

Ask four questions:

1. What measurable requirements must you meet to retain the protection?
2. How is performance measured, particularly where central sales affect the results?
3. Will you receive written notice and an opportunity to remedy any shortfall?
4. Can the franchisor change the boundaries or exceptions unilaterally?

Speak to existing franchisees about how the rules work in practice. Ask about nearby openings and how disagreements over customer allocation have been handled. Their experience complements the agreement, but is no substitute for written rights.

Finally, test your budget against a less favourable scenario: fewer centrally referred customers, more online sales or a new outlet just outside your boundary. If profitability depends on an exclusive right that is not in the agreement, you do not have a sound enough basis for your decision.

Practical conclusion: Do not sign on the strength of a map or a verbal promise. Make sure the territorial boundaries, exceptions, customer allocation and rules for making changes are documented and reviewed by a lawyer with franchise expertise.