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Territory Development:
What Every Franchisee
Should Know
By Lynette McKee
38 MINORITIES IN FRANCHISING 2002
F O C U S L E G A L I S S U E S
You’ve done all the research.
You’ve narrowed your
options. And you’ve finally
decided on the franchise concept
that is right for you. But have you
thought about how you plan to grow
your business over time?
For instance, do you plan on opening one unit
now, and then—if business is good—consider
opening an additional unit later? Or, do you plan on
opening several units over the next several years?
These are questions that need to be answered
before you sign your franchise agreement, because
each scenario requires a slightly different agreement
and presents its own set of opportunities and
challenges.
Franchise companies typically offer two types of
development agreements: single unit franchise
agreements and multi-unit franchise agreements.
Single Unit Franchise Agreements
Newer franchise companies may initially offer single
unit franchise agreements, particularly when trying
to get the concept up and running. Either through
solicitation, or random call-ins by interested parties,
the franchisor may choose to allow one unit of
business to be opened by a franchisee. This
approach typically makes it easier to bring new
franchisees into the system because the field of
potential franchise candidates is expanded significantly.
If you are considering a single unit franchise
agreement, there are important factors to be evaluated.
For instance, are the markets co-developed by
both the company and the franchisees? Is there a
potential for encroachment of the business by the
franchisor or other franchisees in the market? How
are the marketing efforts for the DMA (Designated
Marketing Area) or ADI (Area of Dominant
Influence) handled? Is there a marketing co-op?
What percentage of voice does each individual
franchisee have in the territorial marketing co-op?
Another point to consider is how does the
franchisor handle the request for site development
by the franchisee? Is it a first come first serve basis?
One way to have a smooth process is through a
Trade Area Reservation System. It avoids the issue
of which franchisee brings in the trade area-site first.
Under the reservation system, a franchisee may
formally request the exclusive right to locate and
secure a site in a designated trade area, for a given
fee and in a specific time frame. One example of
the reservation system would be to structure a sixmonth
exclusive agreement for a defined trade area
with an up-front fee that is approximately five
percent of the initial franchise fee. During this time
the franchisee may locate and secure the site
without the worry that another franchisee of the
system may deliver a site to the franchisor first. This
fee may be non-refundable, but is applicable to the
initial franchise fee when a site is approved by the
franchisor.
Multi Unit Franchise Agreement
Most larger franchisors tend to manage their growth
through multi-unit development. The franchisor
may define its territories by DMA’s, counties, states
or other various mapping definitions. Business
segments that are larger in nature, such as the
restaurant industry, find multi-unit development is a
more manageable system for the franchisor. Fewer,
but more sophisticated franchise business partners,