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I’m sure you’ve got heard the phrase, “Location is everything.” When it involves franchise firms, this opinion is not only true, but also rigorously considered and negotiated as a part of the franchise agreement process. I’m talking about franchise territories – how they are divided, chosen and dispersed among potential franchise owners.
In the world of franchising, one of the most vital business model decisions you’ll make is whether to purchase a location-based brick-and-mortar brand or a service-based brand. Based on this decision, the rules for territories change.
Service-based brand territories
While this is not a general rule, generally speaking, service-based brands are essential, on a regular basis services needed in almost every market. Consider home maintenance services reminiscent of lawn care, plumbing, roofing, etc. These brands do not require a retail-facing storefront. Therefore, the territory is not demarcated from a specific central point of the property.
Franchise firms will determine the size of the territory based on a certain level of projected revenue from the customer base. For service brands, projected revenue potential will likely be based on population, average household income, number of companies, or a combination of those aspects.
Take the painting franchise for example. This territory will likely be based on broad aspects reminiscent of general population or variety of households, as this is a widely used service. Alternatively, consider pool maintenance. In this case, the territory could also be defined by the variety of homes with in-ground pools, as this may occasionally not represent a uniform customer base inside a given geographic area.
It’s essential to grasp that with service brands, you can profit by generating greater profits through economies of scale. This signifies that by purchasing more territories of a service-based brand, you are creating multi-factor revenue and revenue potential, but not a capital investment.
For example, if one service territory with equipment, vehicles, employees, and working capital costs $150,000, the original purchase of three territories won’t cost $450,000, but much less, perhaps around $225,000. With the sort of model, you simply invest upfront in additional territories – which change into cheaper as more are purchased – while still starting with the same equipment, vehicle and worker package as in one territory. You only add additional capital as you scale.
Location-based brick-and-mortar brand territories
For most brick-and-mortar brands, when a potential franchisee signs a property lease, they receive exclusive territorial rights around that address. For example, they could have exclusive coverage inside a 2 to five mile radius of the storefront.
Furthermore, assume that the franchisee is interested in purchasing greater than one unit. If they buy a three-unit territory, they are called an “area developer” or multi-unit franchisee. Once someone commits to this, most brick-and-mortar brands won’t have the franchisee sign a franchise agreement immediately, but slightly sign a development agreement for an exclusive geographic area, with individual franchise agreements signed for each location as leases are signed.
In this case, the franchisee will receive protected postal codes and will find a way to sign real estate contracts in these areas inside a certain time frame (for example, inside 18 months). Franchisors want a schedule that gives a level of urgency. It’s value noting that they often work with franchisees if they operate in a particularly tight real estate market and can often extend this era if needed.
An essential distinction is to acknowledge that in the case of a standard brand consisting of one stationary unit, the franchisee is not covered by radial protection until they sign a real estate lease agreement. However, if the franchisee wants exclusivity and broader protection before sign a lease agreement, then they may often have to be a multi-apartment developer.
Unlike the previous section, which specifically discussed service-based brands as benefiting from the sales economy, it ought to be noted that stationary brands typically have more uniform initial investment costs, and each additional stationary unit will have a similar investment cost, although it might be more scalable and easier to administer across multiple units.
Other brand territories
It’s value noting that sometimes there are no territories for some brands. This is most frequently seen in business-to-business franchise models, which are more dependent on customer relationships.
For example, imagine services reminiscent of coaching, marketing, graphic design, etc. In such cases, building relationships with firms that are multi-million dollar organizations and offering solutions reminiscent of training, coaching, consulting, etc. do not require specific locations. There is no territory here, as customers might be scattered throughout the area and there is no requirement for proximity to the services provided. Due to such features of the business model, some brands do not have territorial exclusivity.
As mentioned earlier, territories are one of the few elements that can be negotiated with the franchisor. Most items in a franchise agreement are considered non-transferable, but territories are the most an essential exception to this rule. Territories are entirely franchisee-specific and due to this fact often have nuances depending on the particular market, the franchisee’s purchasing decisions and the availability of territories.
Some franchisors will define territories in advance, while others will come in, say “the market is open” and ask franchisees what territories they need and then build them from there. It is essential to contemplate these questions before purchasing a franchise. If the prospect of surveying this territory is intimidating or ominously time-consuming, you could decide to work with a franchise consultant who has already surveyed the territory and will only present opportunities that suit your goals and are available in your market.