Territory is defined as a specific area in which the franchisee has the exclusive right to conduct business, without the threat of competition from fellow franchisees. The area of territorial rights can be based on a number of factors such as population, geographical area, and business potential or neighboring franchisees. The population criteria used for determining the boundaries of the territory includes the population base, the density of population, and growth trends of population.
A large market territory would be based in an area of high population density, where demand for the product or service is high. The ideal geographic location for this is a location based in or near a city, in which traffic patterns are high. Granting a protected area to the franchisee helps to expand and develop the business, for both the franchisee and the franchisor. The franchisor is able to penetrate market areas for maximum sales and profits, while franchisees are afforded a defined territory to achieve desired results without being particularly vulnerable to local competition.
Territorial rights are one of the leading causes of conflict, dispute, and litigation in the franchise industry. In some cases, franchisors may choose a location for new franchisees close to existing franchisees. This can result in a decrease in sales and profits for the existing franchisee due to the diminished territory and increased competition. To prevent these conflicts from arising, all information regarding the territory is stated in the franchise agreement. The contract should document legal details about the territorial rights and exclusivity of the franchisee. This includes the boundaries of the territory, and information on the right to renegotiate territorial boundaries after a specified time span.