If you’re considering buying a franchise, one of the most important aspects you need to understand is franchise territories. The concept of territories in franchising determines where and how you can operate your business, how much competition you may face, and ultimately, how profitable your franchise can become. In this guide, we’ll break down how franchise territories work, the different types, and what every franchise buyer should know before signing an agreement.
A franchise territory is a defined geographic area where a franchisee has the right to operate their business under the franchisor’s brand. This territory may be exclusive (protected from other franchisees) or non-exclusive (shared with others). The purpose of defining territories is to protect franchisees from internal competition and give them a fair chance to grow their customer base.
For example, if you purchase a fast-food franchise in a city, your territory might cover specific ZIP codes, a set radius in miles, or even an entire district, depending on the agreement.
Understanding your territory rights is crucial because it impacts:
Competition – Exclusive territories prevent another franchisee from opening nearby.
Market potential – A larger or more densely populated territory means more customers.
Scalability – Some franchise agreements allow expansion if you meet performance benchmarks.
Return on investment (ROI) – Well-defined territories reduce overlap and increase profitability.
Not all territories are created equal. Here are the most common types:
You are the only franchisee allowed to operate in a specific area. This protects you from internal brand competition and ensures your marketing efforts directly benefit your location.
Other franchisees may also operate in the same area. This can lead to competition but is common in industries like retail and food where customer demand is high.
You have rights to operate in your territory without another unit opening too close. However, franchisors may still sell products or services online that reach your area.
Some franchisors offer larger territories but require franchisees to meet sales or growth targets. If you fail to perform, the franchisor may reduce your area or allow another franchisee in.
Franchisors use different methods to outline territories, such as:
Population size (e.g., 50,000 residents per franchisee)
Geographic boundaries (ZIP codes, cities, or counties)
Demographics (target income levels, age groups, or lifestyle)
Radius around a location (e.g., a 3-mile exclusive zone)
Always review the Franchise Disclosure Document (FDD) to understand how your territory is defined and protected.
Before signing a franchise agreement, ask these key questions:
Is my territory exclusive, non-exclusive, or protected?
How are territory boundaries determined?
Can the franchisor reduce or split my territory in the future?
Will online or delivery sales count toward my territory?
Can I expand into multiple territories later?
While territories provide protection, they also come with potential drawbacks:
Territory disputes – Overlapping boundaries can cause conflict between franchisees.
Limited growth – Small territories may restrict customer reach.
Online sales conflict – E-commerce may blur territorial lines.
Franchisor flexibility – Some franchisors retain the right to change territory terms.
So, how do franchise territories work? Simply put, they define where you can operate and how much protection you get from competition within the same brand. For franchise buyers, territories are a vital part of ensuring success and profitability.
Before signing a franchise agreement, always review the territory clause in the FDD, ask the right questions, and negotiate where possible. A well-defined territory can make the difference between a thriving business and a struggling one.
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