Territorial rights in franchising: defining the boundaries

When turning an existing business into a franchise, you need to decide exactly what a franchisee’s territorial rights cover. Otherwise, a promise of “your own territory” can create very different expectations. In a franchise network, local investment and network-wide expansion need to work together. Start with clear rules for opening new outlets, not just a map.

1. Distinguish the right to operate in an area from exclusivity

A geographical territory can mean several things. It may define where the franchisee can open premises, where the business is expected to provide services, or where the franchisor promises not to establish competing outlets. These rights are not automatically the same thing.

First, decide which model your existing business can support. If customers mainly visit a physical shop, nearby openings can have a significant impact. For a mobile service, travel times, availability and capacity may matter more than the distance between two addresses.

Answer three questions before offering your first franchise:

• Right to establish premises: Where can the franchisee base their business, and does relocation require approval?
• Protection against new outlets: Are there limits on the franchisor’s ability to open company-owned outlets or enter into agreements with other franchisees?
• Exceptions: Should existing outlets, temporary sales locations or particular sales channels, for example, be excluded?

State explicitly if no territorial exclusivity is granted. Do not use phrases such as “your town” when recruiting franchisees if the agreement only grants the right to operate from specified premises. A limited but clearly defined right is easier to assess than a generous but vague promise.

2. Define the territory and test customer patterns

Make the territory identifiable with a dated map attached to the agreement and a written description of its boundaries. Specify which takes precedence if the map and description differ. If you use postcodes, you also need to decide what happens when postcode boundaries change.

Do not rely solely on administrative boundaries. Draw on experience from your existing business to understand where customers come from, how far staff travel and which parts of the territory can realistically be served. Distinguish observed customer patterns from assumptions about future demand.

Then test the model against specific situations:

• A customer lives in one territory but works near another outlet.
• A business customer needs services in several locations.
• A franchisee receives an unsolicited enquiry from a neighbouring municipality.
• A new outlet is planned close to the territory boundary.

The aim is to identify ambiguities, not automatically to prohibit sales across boundaries. Document how bookings, deliveries and practical cooperation will work. Territorial protection does not mean that the franchisee owns the customers in the area or can restrict their freedom to choose.

3. Manage the website and shared customers

Digital channels make territorial rights more complicated. A shared website can generate demand nationwide, while the work is carried out locally. Decide how enquiries will be allocated and who is responsible for the customer when several outlets are involved.

A workable model needs to specify who receives the order, who enters into the contract with the customer and who provides the service. Also explain how revenue and any payments between outlets are allocated when one outlet makes the sale and another fulfils the order. Keep these arrangements separate from protection against new outlets.

If the franchisor intends to retain certain national accounts, that exception should be clearly defined. Avoid wording that allows any attractive future customer to be classified as a centrally managed account without predictable criteria.

Have a lawyer with competition law expertise review territorial restrictions. The Swedish Competition Act (2008:579) and EU competition rules may apply. Among other things, these rules distinguish between actively targeting customers and passive sales, such as responding to unsolicited customer enquiries. Territorial protection therefore does not give an unrestricted right to prohibit sales to customers outside the territory. Restrictions on online sales also require particular care.

4. Set the rules for the next opening

Plan from the outset how new outlets will be added. Will an existing franchisee receive advance notice of a nearby opening, have an opportunity to comment, or have a contractual right to apply to operate the next outlet themselves? Explain the difference between these options. Consultation is not the same as a right of veto or priority.

If territorial protection can be changed, the agreement must specify the grounds and the process. Define the circumstances that can trigger a review, the evidence to be used and how the franchisee can respond to the proposal. Avoid leaving the scope of the territory entirely to the franchisor’s discretion.

Sweden has specific legislation: the Act (2006:484) on Franchisors’ Duty to Provide Information. It requires clear, comprehensible written information to be provided well before the franchise agreement is signed. Territorial rights and significant exceptions need to be explained as part of what the agreement entails. However, the Act does not give franchisees automatic exclusivity within a territory; those rights must be set out in the agreement, within the limits of applicable law.

Practical takeaway: Prepare a territorial schedule and test it against real customer situations before offering your first franchise agreement. The map should show the boundaries, but the terms must explain what those boundaries mean.