Franchise Your Business: Exclusive Territories?
In all independent distribution systems, the question of territory is always one of the most significant and pivotal elements of building a successful structure. I have been on both ends of these equation, as a licensee and a franchisor and dealt with the good, bad and ugly elements of territory designation. The question of whether to designate territories based on exclusive rights or non-exclusive is always a big one and requires careful thought and planning.
Franchise development is the assignment of geographical areas to independent business owners who will own and operate locations of the franchise system. Franchisees have an interest to own exclusive rights to the area while the franchisor has an interest to maintain control and the freedom to place units where they deem appropriate.
The issue in franchising or licensing is that there are several phases to the development of a franchise system. Phase I is the initial launch of the franchise organization. This constitutes the planning, paperwork and initial unit sales of the distribution model. Because the organization is not validated and has not acheived any level of critical mass, the franchise is a tough sell. The first ten are often the most difficult and it is during Phase I that there is the highest likelihood where a franchise organization fails to develop any traction. It is during Phase I that typically it is recommended that an exclusive territory be used and implemented in order to effectively sell units. Without the exclusivity of the agreement, the first franchisees are given little reason to join a small and untested franchise model.
In a very generalized sense, the Phase II portion of a franchise system is after the model has opened the first ten units and is beginning to acheive critical mass. Critical mass allows the franchisees to benefit from brand recognition, economies of scale, multi-market awareness and validation of the business model. It is during this phase that it is possible for a franchise system to make the transition from an exclusive territory based model to that of an area of primary responsibility where the franchisor maintains more control over the placement of units. Of course, a franchisor has it's most success if the best interests of the franchisees are put ahead of anything else. During Phase II, with the agreement providing the franchisor control over how many units go into a particular area, the success of the franchise system relies on the morals and principles of the franchisor.
When considering whether to franchise your business, it is important to look at the progression of a distribution system and take into account these different phases a model must go through. These implications should play into the structure and designations of the franchise agreement and franchise business model.
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