From a franchisor's perspective, what are the benefits of offering exclusive territories to franchisees?
It all goes back to the reason a franchisee wants to invest in you in the first place – they are buying into a proven business model, an established brand and your expert training and support. If you are pitting them against another franchisee in the same territory, then none of those things are exclusive. They can get all the competition they want from going it alone!
On the other hand, what are the potential pitfalls of including exclusivity clauses in franchise agreements?
I think the pitfalls are mainly for the franchisor, in terms of the risk that the franchisee has complete control of the territory and perhaps doesn’t make the best of it. Let’s remember why successful business people franchise their successful businesses – it’s to get the maximum amount of return from each territory.
Franchisors set minimum performance targets, but I can assure you they won’t be happy if that’s all they get over the course of a 5-year franchise agreement.
For what reasons, or in what circumstances, would a franchisor decide not to offer exclusivity?
The reasons and circumstances vary massively depending on the sector and the brand. For example, some fast food brands or convenience store brands can absolutely offer multiple territories within any geographic area – think of some of best known coffee or burger franchises, they can easily support multiple units within a given territory and there’s no reason to assume they can’t be owned in relative harmony by two or more competing franchisees.
From time to time, as franchisor may want to limit exclusivity until a franchisee has proved themselves capable of maximising the potential of their area.
What are the dangers of not offering exclusive territories to franchisees?
Good sales people thrive on internal competition, but it doesn’t necessarily correlate that good franchisees do. You don’t want your franchisees to be fighting each other – inspired by and encouraged by each other is great, but threatened by, doesn’t always get you the results you want. You want your franchisee to feel like an empowered business owner, not a pawn in a bigger game.
The other clear downside to not offering exclusive territories, is leaving the successful and ambitious franchisee with nowhere to grow their business. There are few more volatile people in franchising than a franchisee who feels bored and restricted.
What factors should franchisors take into account when deciding whether or not to offer exclusivity?
Firstly, you have to evaluate your franchisee – have they convinced you they are ambitious and talented enough to fully exploit the territory – and what are the financial consequences of an under utilised patch?
Secondly, do you have enough information from your pilot (or existing franchisees) to have an absolute grip on what you can reasonably expect from a single franchisees performance? It’s not that easy to tell an existing franchisee that they aren’t performing to your expectations so you are going to sell off part of their ‘exclusive’ territory. In reality it happens of course, and on occasion some franchisees are grateful that you’ve taken the pressure off, but, it’s always better to have awarded the right amount of territory to the right person first time around.