Territory of Franchisee assigned by Franchise Agreement

Beginning a new franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The territory of a franchisee defines the geographic area in which the franchisee is permitted to operate, and directly impacts the franchisee's potential for revenue and the franchisor's ability to grow the brand.

Franchise territories are not all the same. The franchise agreement will specify the type of territory granted, which falls into a few main categories:

• Exclusive Territory: This is the most protective type of territory for a franchisee. It grants the franchisee the sole right to operate the franchised business within a specific, defined geographic area. This means the franchisor cannot open a new company-owned location or grant a franchise to another franchisee within that territory. This protection allows the franchisee to build a customer base and invest in local marketing without the fear of direct competition from their own brand.

• Protected Territory: A protected territory offers a middle ground. It prevents the franchisor from opening another brick-and-mortar location within a certain radius or area. However, it often includes exceptions. For example, the franchisor might reserve the right to sell products or services through alternative channels of distribution, such as online sales, special events, or non-traditional locations (e.g., airports, stadiums, or kiosks within a big-box store).

• Non-Exclusive Territory: In a non-exclusive arrangement, the franchisee does not have any protected area. The franchisor can place other franchisees or corporate-owned locations in close proximity. This is more common in industries where location is less critical than, for instance, a service-based business, or in highly saturated markets. While this may seem risky for the franchisee, it can also lead to more brand recognition in the area as a whole.

The franchise agreement must clearly and precisely define the boundaries of the territory. This can be done in several ways:

• Geographic Boundaries: Using specific street names, municipal limits, highways, rivers, or other natural boundaries.

• Postal Codes: For service-based or mobile franchises, territories are often defined by a list of specific postal codes.

• Radius: For a brick-and-mortar location, the territory may be defined as a specific radius (e.g., 5 km, 25 km) around the physical address of the franchise.

• Demographics: The territory may also be defined by demographic criteria, such as population size, household density, or income levels.

For a prospective franchisee, the territory is a major factor in the decision to purchase a franchise. It's not just about where the business will operate; it's about market potential, competition, and future growth. A franchisee needs to carefully review the territory provisions to understand:

• The scope of their market and whether it is large enough to be successful.

• Whether the franchisor has the right to sell products or services online or through other channels within the territory.

• Whether the franchisor can open or authorize new franchises that could compete with them.

• Any performance standards that the franchisee must meet to maintain their territorial rights.

Before investing in any franchise, it is crucial to carefully review the Franchise Disclosure Document. The franchise disclosure document (and reiterated in the franchise agreement), which is a legal requirement in many Canadian provinces, provides a detailed breakdown of all fees, including initial costs, ongoing royalties, and other charges, as well as the particulars of the territory being assigned to the franchisee.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

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Key Aspects of a Franchise Disclosure Document: A Franchise Disclosure Document is a crucial legal document in Canada that provides a prospective franchisee with essential information about a franchise system. The franchise disclosure document is intended to help the potential franchisee make an informed investment decision. Read more.

 

Key Aspects of a Franchise Agreement: A franchise agreement is a legally binding contract that governs the relationship between a franchisor and a franchisee, which is drafted strongly in favour of the franchisor (as they are in a position to heavily dictate the franchise arrangement that they offer to prospective franchisees). While the specifics can vary, there are several key aspects that are almost always included. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.