Understanding the key elements of choosing a franchise territory

Welcome to another episode of Atlanta Franchise Today with host Leslie Kuban, expert franchise consultant and owner of FranNet Atlanta. Atlanta Franchise Today is dedicated to bringing entrepreneurs and business owners the best practices and tips for their franchise goals. When you start exploring franchising, you’re quickly going to learn that territory is going to be an important part of your research and your decision. On today’s episode, Leslie takes a dive deep into franchise territory. Why is it important, and what are some pros and cons?

Transcription: 

Leslie Kuban:
So what do I mean by franchise territory? So in most franchise agreements, the franchisor is going to provide some kind of protection and exclusivity for a geographic area that you as a new franchisee now own and control. So this is your market to be able to advertise and service the customers inside the boundaries of this protected territory.

Leslie Kuban:
Now, how is franchise territory constructed? Well, that’s very different from one type of industry for the next. So in service businesses, like let’s take a molly made home cleaning franchise, for example. Those territories may be defined by a set of zip codes or a county or multiple counties, as opposed to something like a retail business where you have a physical address, a bricks and mortar location, where the customers come such as a UPS store or an Orange Theory Fitness, oftentimes territories are based on a radius around that franchise location address. So the only person who can open up locations inside that radius is the franchisee who owns that territory. Now, when you start to look at business to business franchising, it’s going to work differently.

Leslie Kuban:
Many times business to business franchises will limit the number of franchisees in a market, but they’re not limiting those franchisees from where and how they market their services and the delivery of the service to the end customer, and there’s a lot of good reasons for that. It really has to make sense for the end customer first and foremost. And a great example is CertaPro Painters, which is both a B2C and a B2B model. Now for their B2C customers, there is a defined customer radius or territory definition, and the franchisee can only it in service inside the boundaries of their territory. But when it comes to the commercial side of their business, they don’t have those same restrictions.

Leslie Kuban:
So as an example, a CertaPro Painters franchise might have a owner of auto body shops that has locations all over city, maybe all over the State. And that auto body shop owner wants the ability to work with one service provider for their commercial paint contracting needs not having to work with 10 different franchisees all over the State. So it’s really better for the end customer and this is why you see how territory is constructed without those same restrictions in the world of business-to-business. Like many of the sign and graphics franchises that we work with, they may have customers all over the city, all over the region, all over the globe even. And sometimes I have clients I’m working with object to this notion of how territory with B2B franchising sometimes works. And my advice to them is that they really do probably have to open their mind to why it works this way.

Leslie Kuban:
Because it has to make sense for the end customer in order to keep and retain that long term customer in a B2B franchise model. So let’s start to look at some of the pros and then the potential cons of territory and franchising. One of the biggest pluses is that the territory can be an asset in and of itself, especially if you own the franchise in prime areas with strong demographics that are growing. Now, here in Atlanta, some examples of these prime areas would be areas like Alpharetta, Johns Creek, Duluth, Roswell, East Cobb, Woodstock, several others as well. And at some point you’re going to be ready to exit your business. You’re going to be ready to sell your business, and ownership of prime territory can be a very positive factor when it comes to the valuation of your business for sale.

Leslie Kuban:
It’s like the real estate market. Homes in good neighborhoods with good school systems can command a higher value because of those geographic parameters. Territory ownership, another benefit is that it can protect a franchisees future growth path, and this is also very attractive to franchisors. Most franchise brands would much prefer to have franchisees who have an appetite to grow. They’d prefer to have one franchisee who owns three territories versus three franchisees who each individually own one. And many times they’re discounting the fees on that second, third, fourth territory as an incentive for people to want to grow. And the big benefit is this secures your ability as a franchise owner to grow over a period of time.

Leslie Kuban:
Now, something important to expect is that you’re going to have a production schedule for your growth. It’s not left open ended. A franchisor is not going to sell multiple territories with no contractual commitment for development of them. So it’s probably going to look like development of the second unit every six months or every 9 months or 12 months. It really will depend on the brand and the industry. Now, a lot of things in these franchise agreements are not negotiable, but the production timeline, the construction of the franchise territory sometimes has some wiggle room. And a lot of times it’s a matter of the potential franchisee and the franchisor coming to a compromise that works for everybody.

Leslie Kuban:
Now a potential con to franchise territory is really the other side of the coin of is that it may limit your franchise choices and limit your future growth path. I think it’s important to know that just because you don’t see a particular brand open and operating in your area of interest, doesn’t mean it’s available to you as a franchise territory. Somebody three years ago may have committed to that area as part of their growth plan, and they are going to develop it at some point in the future. So my tips for how you navigate territory to your advantage is number one, if you are interested in a particular franchise brand, find out right away if that brand has availability in the area of interest to you. Don’t waste your time doing a ton of research on something only to be disappointed later and disappointed quickly to find that it was really never available in the first place.

Leslie Kuban:
Just reach out directly to that franchise brand and discuss what is available. If you’re working with a franchise consultant like me, express those territory and geographic preferences right away. I do tend to work with people who have an appetite to grow and they want to own the prime markets, so we do tend to focus on emerging brands that are not yet household names, but they have strong management. They have deep resources behind them, and that can be really the best of both worlds in franchising. My second tip is you are interested in a mega brand that is already a household name, my tip is that you need to likely be flexible on the geography, where territory is available. You may need to be open to relocating or commuting to where open franchise territory is. You could also explore buying an existing franchise territory from a franchisee who is ready to exit with a major brand.

Leslie Kuban:
And I will tell you that is a smaller pool of opportunities and we’re definitely going to talk about franchise resales in a future episode. And thirdly, if you have appetite to grow, I would encourage you to discuss a multi-unit franchise agreement right away with the franchise brand that you are speaking with. You want to avoid being blocked from your future growth, and the reality is that a franchise brand is not going to wait to see if franchisees are ready or willing to grow if they have other qualified candidates, they are going to enter into franchise agreements and allow them to develop those territories, and you don’t want to be frozen out of growth in contiguous territories. I hope this information has been interesting and useful for you today. I appreciate you tuning in and I look forward to seeing you next week on Atlanta Franchise Today.