Franchisors who don’t clearly document the boundaries of franchisees’ territories put themselves at risk of unintentionally selling off part of a territory already owned by an existing operator.
But many franchise groups don’t keep accurate boundary records, either because they have been lost since agreements were signed or because territories are simply drawn on large maps or street directory pages.
Peter Buckingham, managing director of Spectrum Analysis Australia pty Ltd, says major franchisors often give him their territory allocations with the assurance that “it’s all perfectly all right”.
“When we go and have a look at it and there are overlaps, legally that’s a real issue,” says Buckingham, whose company advises franchise groups on territory allocation and site selection.
Territories should be electronically mapped, and master records updated each time new territories are sold.
“But half of them are on the back of old street directories, and others are in old agreements. people come and go, and the records of something that was set up 10 years ago have been lost,” he says.
New franchisors can also put their businesses at risk through poor territory planning.
Buckingham recalls one franchisor who intended to sell four territories in the Brisbane CBD, but after a few drinks with his first franchisees caved into their demands for bigger territories.
He gave away so much of the fourth territory that there was insufficient to franchise. His company ultimately failed.
Buckingham generally recommends granting exclusion zones or preferred marketing areas rather than selling territories. (The exception is mobile franchises, such as dog washing, where franchisees must have a defined area in which to work.)
But once a retail territory is sold, the franchisee has exclusive rights to an area which, if the franchise group proves highly successful, might be capable of supporting two or three stores. Franchisors are then faced with the costly option of buying back a territory so they can split it up.
Some companies such as Clark Rubber (see break out) grant only an exclusion zone of perhaps 1.5 kilometres around a store.
“The reality is they are probably lucky if they put one within five to 10 kilometres, but they are not limiting themselves to that,” Buckingham says.
He concedes an exclusion zone may appear less valuable than a territory, and may therefore sell for less.
But a franchisor who achieves $25,000 for an exclusion zone rather than $30,000 for a territory would ultimately be better off than the franchisor forced to buy back a territory.
Another option is to grant a primary long-term territory and allow the franchisee to service secondary territories until their business grows. The secondary territories can then be sold to new operators.
While prospective Clark Rubber franchisees may initially have doubts about being granted a 1.5 kilometre exclusion zone, their fears are generally allayed once they understand how the network has been developed, according to Sophie Valkan, the company’s director of corporate services and general counsel.
Franchisees also realise it would be “commercial suicide” for Clark Rubber to make a franchisee non-viable by putting another store too close, Valkan says.
Clark Rubber was originally launched as a family business in the 1940s, sold to Adelaide Steamship Company in the 1980s, unsuccessfully merged with Adsteam’s Maples stores and closed down in the early 1990s.
The Clark Rubber brand was bought by the company’s current managing director, Chris Malcolm, and launched as a franchise group in 1995.
Around 65 franchises have been sold, and the company is targetting 110 outlets by 2006. It will then assess the level of market saturation and may set another target for new stores.
Valkan says one reason for granting exclusion zones was that franchisees play a major role in site selection, and if one decided to move to a better site the exclusion zone could move with them.
It was also difficult to see at what point the new group would reach “cannibalisation” (when a new store steals sales from another too close by).
And because of the time it could take to reach market saturation, the demographics of some areas might change significantly.
“If you mapped out territories in 1990 and you come back 15 years later, you might find you could have had two stores in that territory because of the development that’s happened in it.
“So as a group you are not achieving the penetration you could have if you hadn’t bound yourself by territories,” she says.