In a franchise setup, one of the significant areas that need specific evaluation by a franchisee is the right to be granted an exclusive territory of operation to the exclusion of the right of the franchisor to set up other franchisees. Read on to know more about granting exclusive territorial rights
India has increasingly attracted global brands to establish their franchise arrangements in the country to benefit from the ever expanding Indian market. Indian enterprises have also adopted franchise business models to expand in to the vast Indian territories. Typically, under a franchise model the franchisees benefit from the established business systems of the franchisors under a licensing arrangement with the right to use the trademark and brand of the franchisors, and open franchise outlets for distribution of the products/services of the franchisor, in consideration of payment of franchise fees and/or royalties to the franchisor.
However, franchisors are usually reluctant to grant exclusive territorial rights to a franchisee as it diminishes optimum monetization of their products and services and restricts their right to add new franchise outlets in the area. Further, a non-exclusive arrangement insulates the franchisors from the risk of potential complacency and underperformance by the franchisee. It is also easier to place another franchisee near an underperforming one, then to terminate its arrangement with an underachieving franchise.
Grant of exclusive territorial rights are therefore seen in situations where:
Sometimes, these exclusive territorial rights are also limited to particular ‘test’ period, and continuance of exclusivity is dependent on achievement of certain pre-determined milestones by the franchisee, thereby, protecting the franchisor to an extent from the risk of non-performance.
However, if a franchisee has successfully negotiated exclusive territorial rights for itself, it should be wary of possibility of competitors of the franchisee entering his territory through ‘donut holes’ avenues in this digital age, such as sale through non-traditional, alternate channels of distributions over e-commerce Websites. One way of minimising this risk (to an extent) could be insistence on a provision obligating the franchisor to include a clause within its agreements with other franchisees restricting sale of products/services (through retail or e-commerce outlets) to the area granted to such franchises. Another important provision worth negotiating is the minimum exclusive period with rational milestones in the first few years of the setup, which may gradually increase after a few years prior to bringing an automatic exclusivity drop period.
That said, an exclusive franchises often comes with additional strings attached like an increased franchise fee/royalty formulation, and when it comes to the more established brands, such exclusive rights may not even be on the negotiating table. However, in today’s business milieu, where franchise models are increasingly being adopted by both Indian and global brands as a way to access and develop new markets, it has become imperative for franchisees to strategically consider the need to mark an exclusive territory of operation upfront to assure a growth gestation period, keeping the nature of the brand and the scope in the market in mind.
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