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I’m sure you’ve heard the phrase “location is everything.” When it comes to franchises, this opinion is not only true, but is carefully considered and negotiated as part of the franchise agreement process. I’m talking about franchise territories – how they are divided, selected and distributed among potential franchise owners.
In the franchising world, one of the most important business model decisions you must make is whether to buy a location-based brick-and-mortar brand or a service-based brand. Due to this decision, the rules for the areas are changing.
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Service-based brand territories
While not a blanket rule, service-focused brands are generally everyday, essential services that are needed in almost every market. Consider home maintenance services such as lawn care, plumbing, roofing, etc. These brands do not require a front-line retail store. Therefore, the area is not defined by a specific real estate focus.
Franchising companies set territory sizes based on a certain level of projected revenue from the customer base. For service brands, this projected potential revenue is likely determined by the number of residents, average household income, number of businesses, or a combination of these factors.
For example, consider a painting franchise. This area will likely be based on general factors such as general population or household population as this is a widespread service. Alternatively, you can also think about pool maintenance. In this case, an area may be defined by the number of homes with in-ground pools, as there may not be a consistent customer base within a region.
It’s important to understand that with service brands, you can benefit from making more profits through economies of scale. This means that when you acquire additional territories of a service-oriented brand, you create multiple sales and income potential, but not a capital investment.
For example, if a service territory with equipment, vehicles, employees and working capital costs $150,000, an initial purchase of three territories would not cost $450,000 but significantly less, perhaps around $225,000. With these types of models, you just invest in additional territories up front – which become cheaper the more you buy – while still starting with the same equipment, vehicle and staff package as a territory. You just add additional capital as you scale.
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Location-based, brick-and-mortar brand territories
With most brick-and-mortar brands, when a potential franchisee signs a real estate lease, they receive territory exclusivity surrounding that address. For example, they may have an exclusivity radius of 2 to 5 miles around their storefront.
Let’s also assume that a franchisee is interested in purchasing more than a single unit. When they purchase a three-unit territory, they are called an “area developer” or multi-unit franchisee. For most brick-and-mortar brands, when someone commits to this, the franchisee will not immediately sign a franchise agreement, but instead will sign a development agreement for an exclusive geographic area, with individual franchise agreements signed for each location as the leases are signed.
In this case, the franchisee receives protected zip codes and can conclude real estate contracts in these areas within a certain period of time (e.g. within 18 months). Franchisors want a timeline so there is a level of urgency. It’s worth noting that they often work with franchisees when they are in a particularly tight real estate market, often extending this period if necessary.
One important difference is that with a standard retail brand, a franchisee does not have radius protection until You sign a real estate lease. However, if a franchisee wants exclusivity and more comprehensive protection Before When signing a lease, they typically must be a multi-unit area developer.
Unlike the previous section, which described service-based brands enjoying sales benefits, it is important to note that brick-and-mortar brands tend to have more consistent capital costs, and each additional brick-and-mortar unit has a similar capital cost, but can do better with multiple units be scalable and easier to manage.
Related: Uncharted Territories: Understanding the “territorial rights” of a franchise
Other brand areas
It is worth noting that sometimes there are no territories for certain brands. This is most commonly seen in business-to-business franchise models, which rely more heavily on customer relationships.
For example, imagine services like coaching, marketing, graphic design, etc. In these cases, specific locations are not required to build relationships with companies that are multimillion-dollar organizations and provide solutions such as training, coaching, consulting, etc. There is no territory as customers could be spread anywhere and no physical proximity is required for the services provided. Due to such business model characteristics, some brands do not have territorial exclusivity.
As mentioned earlier, territories are one of the few points that can be negotiated with the franchisor. Most items in a franchise agreement are considered non-negotiable, but most commonly are territories important exception to this rule. Territories are completely unique to the individual franchisee and therefore often have differences depending on the specific market, franchisee purchasing decisions and territory availability.
Some franchisors determine the territories in advance, while others come in, say “the market is open” and ask the franchisees what territories they want and then build from there. It is important to consider these questions before purchasing a franchise. If the prospect of conducting this area research is intimidating or ominously time consuming. You may choose to work with a franchise consultant who has already conducted area reviews and will only show you opportunities that meet your goals and are available in your market.