Item 12 - TERRITORY
Item 12 describes the territorial rights and restrictions you will encounter when establishing your franchise, including an outline of territory definitions and the protections available to you as a franchisee.
Two types of territories are typically presented in the FDD:
Protected territory is defined when certain protections are offered but some rights are reserved by the franchisor, usually regarding other channels of distribution or proximity to the territory. This protection must be defined in the FDD. It is often disclosed as a "Protected Territory", with the franchisor's reserved rights defined. It also includes a statement such as "this territory is not exclusive due to certain reserved rights and the franchisee may have competition from other franchisees or company outlets".
Exclusive territory, in which the franchisor will not compete or allow others to compete. This must be disclosed in the FDD as an "Exclusive Territory" and must list the rights of non-competition. This territory does not always include defined boundaries, as they may be negotiated in the Franchise Agreement. An Exclusive territory effectively supersedes a "Protected Territory", but some franchisors include both terms in their Item 12 disclosure.
- What's the status of the litigation? Concluded vs. pending?
- How is the territory defined? Some are defined by population or ZIP Codes, while others may be defined according to specific demographics.
- What are the market considerations or demographics used to design a territory? In homecare franchises, for example, it could be population counts of those 65 and older. In the case of children's services franchises, it could be number of families with children and other considerations.
- Will the territory be exclusive or protected? Some franchisors will allow a franchisee to market or sell into an "open" territory until it's franchised. Be sure to ask what happens to the customers you gained if the "open" territory is franchised. Some franchisors require franchisees to relinquish the customers, while others allow a franchisee to retain them.
- Alternative Distribution Channels: Does the franchisor reserve the right to sell directly to customers regardless of where the customers may reside?