Tuesday, May 28, 2024

How Franchise Territories Can Impact Your Business

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I’m sure you’ve heard the phrase, “Location is everything.” When it comes to franchise businesses, this sentiment is not only true, but carefully considered and negotiated as part of the franchise agreement process. I’m talking about franchise territories — how they’re divided, selected and dispersed among prospective franchise owners.

In the franchising world, one of the most significant business model decisions you’ll make is whether to buy a location-based brick-and-mortar brand or a service-based brand. Based on this decision, the rules around territories change.

Related: Which Franchise Model Is Right for You? Here’s How to Choose

Service-based brand territories

While it’s not a blanket rule, generally speaking, service-based brands are everyday essential services that are needed in almost every market. Consider home maintenance services like lawn care, plumbing, roofing, etc. These brands do not require a retail customer-facing storefront. Therefore, the territory is not determined from a particular real estate center point.

Franchisor companies will define the territory sizes based on some level of projected revenue from the customer base. For service brands, this projected potential revenue will likely be determined by the number of residents, average household income, the number of businesses or a combination of these factors.

For example, consider a painting franchise. This territory will likely be based on broad factors like general or household population because it’s a widely used service. Alternatively, consider pool maintenance. In this case, a territory may be determined by the number of houses with in-ground pools as this may not be a uniform customer base within a geography.

It’s important to understand that where service brands are concerned, you can benefit by creating more profits through economies of scale. This means when you purchase more territories of a service-based brand, you create a multiple factor of revenue and income potential, but not capital investment.

For example, if one service-based territory with equipment, vehicles, employees and working capital costs $150,000, an original purchase of three territories would not cost $450,000, but significantly less, perhaps around $225,000. For these types of models, you are only investing upfront for extra territories — which get cheaper as you buy more — while you still start with the same equipment, vehicle and employee package as one territory. You only add additional capital as you scale.

Related: Is Franchise Ownership Your Next Wealth Move? Here’s How It Compares to Four Other Income Streams

Location-based brick-and-mortar brand territories

For most brick-and-mortar brands, when a prospective franchisee signs a real estate lease, they are given a territory exclusivity around that address. For example, they may have an exclusivity radius within 2 to 5 miles of their storefront.

Furthermore, say a franchisee is interested in buying more than a single unit. If they buy a three-unit territory, then they are what is called an “area developer” or a multi-unit franchisee. When someone commits to that, most brick-and-mortar brands will not have the franchisee sign a franchise agreement immediately, but rather sign a development agreement for an exclusive geographic area, with individual franchise agreements signed for each location as leases are signed.

In this instance, the franchisee will be given protected zip codes, and they can sign real estate agreements within those areas within a certain time period (for example, within 18 months). Franchisors want a timeline so that there is a certain level of urgency. It’s worth noting that they will often work with franchisees if they are located in a particularly tight real estate market and may often extend that timeframe if necessary.

An important distinction here is to recognize that with a standard single-unit brick-and-mortar brand, a franchisee doesn’t have radius protection until they sign a real estate lease. However, if a franchisee wants exclusivity and broader protection before they sign a lease, then they will typically need to be a multi-unit area developer.

In contrast to the previous section which detailed service-based brands as benefiting from economies of sale, it’s important to note that brick-and-mortar brands typically have a more uniform upfront capital cost and every additional brick-and-mortar unit will have a similar investment cost, although can be more scalable and easier to manage with multiple units.

Related: Uncharted Territories: Understanding a Franchise’s ‘Territorial Rights’

Other brand territories

It’s worth noting that sometimes, with certain brands, there are no territories. Most often, this is seen in business-to-business franchise models that are more dependent on customer relationships.

For example, imagine services like coaching, marketing, graphics design, etc. In these cases, building relationships with businesses that are multimillion-dollar organizations and offering solutions like training, coaching, consulting, etc. don’t require specific locations. There is no territory because clients could be spread out all over and there is no proximity requirement for services provided. Because of business model features like this, some brands do not have territory exclusivity.

As previously mentioned, territories are one of the few items that may be negotiable with the franchisor. Most items in a franchise agreement are considered non-negotiable, but territories are the most important exception to that rule. Territories are entirely unique to the individual franchisee and therefore often include nuances depending on the market in question, the franchisee’s purchasing choices and the availability of territories.

Some franchisors will pre-define the territories beforehand, while others will come in, indicate “the market is open” and ask franchisees which territories they want, then build it from there. It’s important to consider these questions before purchasing a franchise. If the prospect of performing this territory research is intimidating or ominously time-consuming, you can choose to work with a franchise consultant, who will have already done territory checks and will only present opportunities that match your goals and are available in your market.



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