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Does exclusivity mean franchisees truly have a place of their own?

Written by Kate Legg on Monday, 16 January 2017. Posted in Legal

Having the sole rights to a territory can certainly sway someone’s decision when choosing which franchise to buy. But it’s worth bearing in mind that exclusivity comes with plenty of exceptions attached

Does exclusivity mean franchisees truly have a place of their own?

When it comes to choosing a franchise, picking the right network is only half the battle. It’s also important to be in the right location and to understand what geographical rights the franchise agreement gives you. This is one area where the franchise agreement must be read very carefully as things may not be as they first appear. Most franchise agreements give the franchisee “exclusivity” in their local territory but exclusivity can mean different things in different agreements and might only apply in certain circumstances.

Exclusive rights

Most people would assume that exclusive rights mean that the business owner is the only person allowed to operate the business in that area. However, there are franchise agreements that also allow the franchisor to trade there in some, if not all, circumstances.

For example, the franchise agreement may give the franchisee exclusivity provided that certain performance criteria are met: the franchisor may have the right to withdraw it if standards fall or targets are missed. It’s easy to see why this would be attractive – if a franchisee has exclusive rights to an area, the franchisor will want to be sure they are developing it to its full potential. However, withdrawing exclusivity in this situation may not be the best solution.

The effect of doing so is that two or more franchisees are then competing for the same customers. At best, this is in an inefficient use of resources; at worst, there’s a risk of customers getting annoyed by multiple sales calls.

Equally, a franchise may reserve the right to choose who gets to deal with national accounts in the franchisee’s territory. That could mean that the franchisor or another franchisee serves those customers, even though they are based in the franchisee’s area. The logic behind this is first that national accounts are best managed centrally – for example, the franchisor may negotiate special deals that apply across the country. Secondly, a network won’t want to risk losing an entire account because one local franchisee doesn’t get on with their local customer. It’s far better to allow someone else to look after that customer and preserve the national relationship for the benefit of the network as a whole.

Rather than offering exclusivity, some agreements will give the franchisee ‘sole’ rights. This usually means that the franchisor won’t appoint any other franchisees in that area but that the franchisor can continue to operate in the franchisee’s territory. This is unusual but not impossible. However, the big risk with this approach is that the franchisor might try to cream off the most profitable work in the area and leave the franchisee to deal with the rest.

Things become even more complicated if a neighbouring territory is temporarily empty. The franchisee may be allowed to operate in that area in the interim but could find access to those customers is denied once the territory is sold. Some franchise networks have a formal process in place to deal with this situation that allows the franchisee to be compensated for the customers they have won in the neighbouring area. Unfortunately many don’t and this could mean that the franchisee is left disappointed when their customer base suddenly shrinks or they are forced to hand over part of their customer list without compensation. To mitigate this, some networks offer franchisees a right of first refusal before the neighbouring territory is sold.

A similar problem can arise where a franchisee receives an unsolicited enquiry from a customer outside their area – for example if the customer finds the franchisee online or by personal recommendation. Some networks will simply force the franchisee to pass the enquiry on. Others have schemes in place that enable them to receive a commission for the sale and some allow the franchisee to serve the customer in full without the need to compensate the neighbouring franchisee.

Issues can also sometimes arise where a franchise network is sold or merged with another business. Joining together the two brands may lead to their being multiple branches in the same territory. For example, when Dollond & Aitchinson Opticians merged with Boots Opticians in 2009, the former’s stores were rebranded under the latter’s logo, often resulting in multiple Boots Opticians stores within the same town or shopping centre.

It’s also worth remembering that only the specific business activities that are authorised under the franchise agreement will apply in the exclusive area. If the franchisor branches out into a new but related activity, new franchisees may be allowed to move into that area to promote the new goods and services. This is rare but is a common source of consternation if it does arise, particularly if the old and new business activities are indirectly competing with each other. Most reputable networks will give existing franchisees a right of first refusal if new products or services are introduced but that wont assist a franchisee who is unwilling or unable to take on the new line.

Overall, the important key message is that franchisees ensure that they fully understand the extent of geographical rights – if any – that are being granted to them, including any circumstances when the boundaries may be moved or exclusivity withdrawn.

About the Author

Kate Legg

Kate Legg

After more than a decade advising other business owners, Legg has recently fulfilled a long held ambition and become one herself. Now the founder, director and CEO of Komerse, a legal practice specialising in commercial law and franchising, Legg is clearly practising what she preaches.

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