I'm sure you've heard the expression, “Location is everything.” When it comes to franchise businesses, this sentiment 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 allocated, selected and distributed among potential franchise owners.

In the world of franchising, one of the most important business model decisions you'll make is whether to buy a location-based brick-and-mortar brand or a service-based brand. Based on this decision, rule around territories vary.

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Service-based brand territories

While not a general rule, in general, service-based brands are essential everyday services needed in almost every market. Consider home maintenance services such as lawn care, plumbing, roofing, etc. These brands do not require a retail storefront facing customers. Therefore, the territory is not defined by a certain central point of real estate.

Franchise companies will determine territory sizes based on certain levels of projected revenue from the customer base. For utility brands, this projected revenue potential is likely to be determined by the number of residents, median household income, number of businesses, or a combination of these factors.

For example, consider a painting franchise. This territory is likely to be based on broad factors such as general or household population because it is a widely used service. Alternatively, consider pool maintenance. In this case, a territory may be defined by the number of homes with in-ground pools as this may not be a uniform customer base within a geography.

It is important to understand that when it comes to service brands, you can benefit by creating more profits through economies of scale. This means that when you buy more territories of a service-based brand, you create a multiplier of revenue and revenue potential, but not capital investment.

For example, if a service-based territory with equipment, vehicles, employees and working capital costs $150,000, an original purchase of three territories would not cost $450,000, but significantly less, perhaps around $225,000. For these types of models, you're only investing upfront for additional territories – which get cheaper as you buy more – while still starting with the same equipment, vehicles, and worker pack as a territory. You only add additional capital as you scale.

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Location-based brick-and-mortar brand territories

For the majority brick and mortar brands, when a prospective franchisee signs a real estate lease, they are granted a territory franchise around that address. For example, they may have a franchise radius within 2 to 5 miles of their storefront.

Furthermore, say a franchisee is interested in purchasing more than a single unit. If they buy a three-unit territory, then they are what are called “area developers” or a multi-unit franchise. When one commits to this, most brick and mortar brands will not have the franchisee sign a franchise agreement right away, but instead sign a development agreement for an exclusive geographic area, with exclusive franchise agreements signed for each location as they are signed. rents.

In this case, franchisees will be given protected zip codes and they can sign real estate deals within those areas within a certain period of time (for example, within 18 months). Franchisors want a timeline so there is a certain level of urgency. It's worth noting that they'll often work with franchisees if they're in a particularly tight real estate market, and can often extend that term if needed.

An important distinction here is to recognize that with a standard single-unit brick-and-mortar brand, a franchise has no shielding. until they sign a real estate lease. However, if a franchisee wants broader exclusivity and protection BEFORE they sign a lease, then they will usually have to be a multi-unit area developer.

Unlike the previous section which detailed service-based brands that benefit from sales economies, it is important to note that brick-and-mortar brands typically have a more uniform initial capital cost, and each additional brick-and-mortar unit will has a similar investment cost, although it may be more scalable and easier to manage with multiple units.

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Other Brand Territories

It is worth noting that sometimes, with certain brands, there are no territories. Most often, this is seen in business-to-business franchise models that depend more on customer relationships.

For example, imagine services like coaching, marketing, graphic design, etc. In these cases, building relationships with businesses that are multi-million dollar organizations and offering solutions such as training, coaching, consulting, etc. it does not require a specific location. There is no territory because customers can be spread all over and there is no proximity requirement for the services offered. Due to the peculiarities of the business model like this, some brands do not have territory exclusivity.

As previously mentioned, territories are one of the few items that can be negotiated with the franchisor. Most items in a franchise agreement are considered non-negotiable, but territories are the most important exception to this rule. Territories are completely unique to the individual franchise and therefore often include nuances depending on the market in question, franchise purchase choices and availability of territories.

Some franchisors will pre-determine territories, while others will come in, say “the market is open” and ask franchisees what territories they want, then build it from there. It is important to consider these questions before purchasing a franchise. If the prospect of doing this field research is daunting or time-consuming, you may choose to work with a franchise consultantwho will have already done background checks and will only present opportunities that match your goals and are available in your market.