In competition
Franchise solicitor Manzoor Ishani explains how to avoidpotential territorial disputes with your franchisor.
It is not uncommon, especially in franchises where the franchisee travels to the customer, for the franchisor to grant exclusive rights over an area to their franchisees.
But what happens if a franchisee isn’t working as hard as he or she could? There may be a number of reasons for this, but in my experience, the most common of these are a refusal to employ more people or a lack of ambition i.e. the franchisee having a low comfort threshold.
Many such franchisees can fully justify their actions (or rather the lack of them) to themselves. After all, it is their business and how much or how fast their business grows, is a matter for them only, right?
The franchisor, on the other hand, is not likely to stand by and watch prospective customers going to the competition. One solution that usually springs to mind is for the franchisor to put a company-owned unit in the franchisee’s territory to soak up the business the franchisee is letting go and, in so doing, is also likely to take customers from the existing franchisee.
In granting exclusive rights, the franchisor agrees that it will not grant a franchise for that business to anybody else and also that the franchisor will not itself operate that business within the franchisee’s area. From the franchisee’s point of view, the advantages of being granted exclusivity are obvious. There can be real disadvantages in granting exclusive territorial rights from the franchisor’s point of view because, in doing so, a franchisor effectively gives up all rights to that territory.
In the case of fixed location franchises (suc as a retail shop), the pressure on franchisors to grant exclusive territories was not so great until recently. For one thing, customers come to the franchisee. However franchisees are increasingly looking for some assurance from franchisors that they will not open another outlet in the near vicinity.
As a particular franchisor becomes more mature so the pressure grows on to find way of increasing turnover. Also, mature franchisors have less need for capital than before and are therefore capable of opening company-owned stores. Previously when a potentially profitabl site became available, they would persuade an existing nearby franchisee (to whom they have given exclusive rights) to relocate or, if no exclusive rights were granted, they would try and sell a franchise for that location.
Nowadays it is tempting for them to take the location for themselves and to operate the business, which could, if they are not careful, be to the detriment of the franchisee who, in the absence of exclusive rights, is, for all practical purposes, powerless to do anything.
Franchisors who are conscious of their public image go some way towards appeasing their franchisees by offering some sort of a deal or by buying the franchisee’s business if it is likely to be adversely affected. They will not necessarily pay top dollar for the business and some franchisees in this situation, who have little choice but to accept the offer, feel betrayed and robbed of their business.
Franchisors who are conscious of their public image go some way towards appeasing their franchisees by offering some sort of a deal or by buying the franchisee’s business if it is likely to be adversely affected. They will not necessarily pay top dollar for the business and some franchisees in this situation, who have little choice but to accept the offer, feel betrayed and robbed of their business.
1. the franchisor has deeper pockets than the franchisee;
2. even if the franchisee could afford to litigate in the courts it would take forever; and
3. the franchisor can make life very difficult for the franchisee on an ongoing basis.
The moral of the story is that franchisees must make sure they have adequate protection against encroachment before they buy the franchise otherwise they will only have the goodwill and good faith of the franchisor torely on.
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