How Restaurant Franchises Divide Territories

A crystal ball won’t reveal gross sales potential for a restaurant franchise. Owners need facts, legal advice and demographic intelligence to estimate how much a franchise might return in 5–10 years. Franchisors that oversaturate the market could put certain franchises at risk, so negotiate aggressively to spell out territorial obligations in the clearest terms possible. Perform due diligence to analyze the market, demographic profiles, development trends in the region and potential for future expansion so that growth is not circumscribed by franchisor policies.

Territorial Allocations

Franchisors divide territories in various ways. Restaurants that provide delivery services often split territory based on telephone exchanges, but these agreements become less common in the digital age when mobile phones typically have an astonishing range of exchanges in any given geographical territory. Other common division strategies for territories include:

• Nonexclusive franchises get no guarantees that franchisors won’t sell other franchises in the area.
• Franchisees can often buy additional franchises within their own nonexclusive territories.
• Exclusive territory agreements mean that franchisors won’t sell additional franchises within a predetermined geographical area.
• Restaurant franchisors commonly use ZIP codes to divide territories geographically.
• Restaurant franchises are generally for fixed periods of 5–30 years.
• Franchisors and franchises renegotiate territory terms after franchising agreements expire.

Master Franchises

Master franchise agreements assign large geographical territories to restaurateurs, which allows them to determine how the area will be franchised and developed. Franchise owners can expand by claiming ownership of additional restaurant units or sell franchises to other independent operators to develop the territory.

• Franchisors get benefits of faster chain expansions by subcontracting their expansions efforts among multiple players while retaining ownership of the concept.
• The strategy solves many problems based on knowledge of the area’s geography and regional variances in food preferences
• Assigned master franchisees are more familiar with the region and its people, so they make better franchising decisions than large, remote national chains.
• Potential pitfalls include legal disagreements among three parties involved with each franchise and potential drift from the franchisor’s standards.

Nontraditional Venues

Restaurant franchises can face competition from their franchisors even when granted exclusive territories. Franchisors often retain rights to market signature foods in nontraditional restaurant venues such as campus restaurants, hotel resorts, airports, shopping malls, sports arenas, carryout shops and hospitals. People in the neighborhood don’t commonly go to restaurants in these places unless visiting for specific reasons, and franchises in these limited-service venues attract travelers and temporary residents.

Alternative venues generate pros and cons for restaurant owners:

1. Benefits for Restaurateurs
   Choosing a nontraditional franchise allows entrepreneurs to sell popular restaurant foods at highway rest stops, convention centers, hospitality venues, military bases and stadiums at reduced franchising fees and lower real estate and overhead costs.
2. Drawbacks for Established Franchises
   Restaurants can lose business to nontraditional venues if customers find it easier to stop at one of these alternative venues. Shopping malls attract people from the neighborhood who visit exclusively to dine. Franchise foods frequently appear at festival venues and outdoor events, which further cuts into potential business for regular franchisees.
3. New FTC Regulations
   New regulations from the Federal Trade Commission define nontraditional venues as exceptions that violate certain exclusive territorial allocations. Franchisors must disclose their specific rights to sell nontraditional franchises within assigned geographic territories. Restaurant chains can’t claim to grant exclusive territory while reserving the right to sell or operate franchises in alternative outlet locations.
4. Expansions
   Most restaurateurs worry about competition from nontraditional franchisees, but the system could provide benefits by making it easier to expand with less capital and training time. Franchisors negotiate each franchise agreement independently, so insist on the right of first-refusal to buy any franchise for an alternative location.

Franchisors can reserve the right to sell another franchise in areas where restaurants underperform or consistently fail to meet company standards. Restaurateurs have many issues to consider when buying a franchise, so research the territory, insist that the franchisor’s development plans are defined in the contract and contact other franchisees to get their take on partnering with the franchisor.