Franchise Business Models: Territory-based vs. location-based
There are many elements of franchise business models to take into consideration before you buy a franchise, and one particularly complex issue is whether you would prefer to join a network based on territories or individual locations. It’s crucial that you examine this element to avoid future “get off my lawn” battles with new franchisees popping up where you thought you had exclusive rights. You want to make sure there are limited blurred lines like Clint Eastwood battles in his neighborhood in Gran Torino.
Image from thegrantorino.com
Here’s how the business models break down and why each one can be appealing:
Definition: Under a territory-based franchise system, you are granted the right to build as many locations or provide services to as many people as you want in a given geographic area.
How territory size is determined: A number of factors go into determining territory size. The two big ones are population and geographic land size. A company usually takes into consideration both the population of a territory and the geographic radius to come up with a territory line that seems fair. That means a territory in a big city will likely be geographically smaller than one in the country.
Variations of territory-based systems: It is important to note that not all territory systems are equal. Some territory systems are completely exclusive, meaning no other franchisee, current or future, is allowed to do business inside your territory (as long as you are a compliant, paying franchisee). Others have looser bounds that allow franchisees to cross the lines of their own territories and, upon occasion, enter into other franchisees’ areas.
Why Territory-based Franchises?
- Exclusive territory agreements: These are sometimes the best solution in systems with highly competitive franchisees or in situations where you know you can’t work well with neighboring franchisees. They protect you from potential competition within your own company. Exclusive territories are often smart for people who want a clear definition of black and white with very little gray area.
- Non-exclusive territory agreements: This type of system works out fabulously for franchisees who can work well together–for example, in a company where there is a strong sense of team spirit or where franchisees are not highly competitive with one another or where the priority is on market domination to maintain a leadership position over competitor brands. These agreements allow you to sell your services to people in nearby territories, allowing you to utilize all of your connections and leads, even if one of them lies within the bounds of a neighboring franchisee’s territory.
Definition: These systems are based on the purchase of one location at a time.
How location parameters are determined: This is done on a franchise-by-franchise basis, but often times a franchisor will give the franchisee a bit of a buffer area around their location. So, you might only buy the rights to open one location, but the franchisor will agree not to sell another location within a two mile radius, depending on the nature of the business.
Variations of location-based systems: Some companies, in addition to selling individual locations, will sell master territories. These territories are treated like territories in a territory-based system, but they are often required to be much bigger, encompassing a region, state or country.
Why Location-based franchises?
- Oftentimes franchisees in the same market can split the cost and responsibility of building a brand with marketing and advertising. Also, if others have opened before you in that market, you are able to reap the benefits of brand recognition. This is a big help for franchises where brand recognition helps sales, but same-market competition doesn’t highly affect profits. For example, look at gas stations. Consumers appreciate the brand name, but aren’t going to drive to the other side of the city to get gas either way. You might as well have another station of the same company across town.
I hope this information clarifies some of the tangled lines around franchise models. The biggest takeaway should be: Know what you’re getting yourself into when it comes to territory and location size. Know what level of competition you are protected from, and make sure you are comfortable with that ahead of time. After all, smart planning now can avoid “front lawn battles” in the future.
Any questions or anything to add? Post it in the comments.