How to Do a Franchise Territory Analysis

When you purchase a franchise, it’s essential to do your homework. After all, franchising is a long-term commitment, and making a bad decision can have severe long-term consequences. In my experience, a franchise territory analysis is one of the most overlooked aspects of this preliminary research.

A franchise territory analysis allows you to look into an area’s demographics and consumer habits, existing and emerging competition, and growth potential. Just as crucially, you can determine whether your franchisor’s territory terms and expectations are fair and realistic.

In this post, I’ll explain the differences between the main types of territory agreements and break down how to perform a franchise territory analysis.

What Is a Franchise Territory Analysis?

After entering into a Franchise Agreement (FA), one of the first things you should do is conduct a franchise territory analysis to gain insights into maximizing your earning potential. You may also find a little wiggle room for amendments to your territory rights if you find anything unfair or undisclosed.

When performing your franchise territory analysis, you’ll evaluate data on your franchise territory, such as local competition, demographics, access, regulations, and potential for growth within the precise boundaries and parameters of your territory rights.

I should note here that in most cases, it’s the franchisor that assigns a territory to the franchisee. While your territory analysis may give you some room to renegotiate the fine print of your FA, you don’t generally get to choose your territory. 

That said, even if you can’t change the terms of your agreement, doing a territory analysis will provide you with invaluable insight for getting the most out of the territory assigned to you.

Many new franchisees overlook this task, but it’s one of the most effective ways to gauge a franchise’s potential and ensure your location drives sales.

Exclusive vs. Non-Exclusive Territory Rights Explained

Before I explain how to actually perform a territory analysis, it’s important to make sure you understand your territory rights. Your Franchise Agreement will stipulate whether or not you have the exclusive rights to a territory. While at the surface level, having the exclusive rights to operate in a particular territory may sound like the best option for franchisees, there’s a little more to it.

Exclusive Territory Rights

If you have the exclusive right to a territory, no other franchisee for the same brand can operate in your designated geographical locations. 

Exclusive territory rights can reduce competition between franchisees in the same parent company and make it easier for you to establish your local presence. It might even sound unfair for a brand not to offer these rights.

However, only being able to operate in certain territories can limit your own potential for growth. And having exclusive rights to a territory doesn’t necessarily mean you can expect more sales.

Keep in mind that franchisees who get exclusive territory rights often have to meet very challenging targets. I suggest carefully considering whether you can live up to the expectations of serving an entire market. If you can’t meet the franchisor’s targets, you might be setting yourself up for a stressful business venture, to say the least.

Non-Exclusive Territory Rights

If you don’t have the exclusive rights to a territory, another franchise for the same brand could open practically on your doorstep. For the franchisor, this can increase competition, innovation, and profits. But it may leave you feeling a little insecure about the sustainability of your business.

On the other hand, a bit of healthy competition and a stronger local brand presence can work in your favor and improve your revenue stream in the long run.

If you don’t have exclusive territory rights, I suggest making sure that your obligations to your franchisor are fair. Your minimum sales requirements should take the likelihood of increased competition into account. You may be able to request a change to your obligations if another franchisee opens up in the same territory.

How to Conduct a Franchise Territory Analysis

Performing a franchise territory analysis is one of the best ways to determine the potential your franchise location has and set yourself up for success down the road. Here is how to do it.

Define the Territory Parameters within Your Franchise Agreement

The size and location of your territory will greatly impact your franchise’s profitability. Your Franchise Agreement will define a geographical area where you can operate a franchise, or you may be able to open within a certain distance or radius of a particular address.

You need to thoroughly understand your territory’s boundaries, not just have a rough idea of the areas you’re allowed to serve. If you have the right to operate in a city, can a competitor open on the outskirts and stir up a headache?

Check your franchise agreement for other territory parameters to make sure you avoid unexpected surprises down the line. For example, your territory rights might define an area with a certain number of households subject to change if new developments emerge.

Evaluate Competition in the Area

Once you thoroughly understand your territory rights, you should analyze the local demand and competition. Even if you have exclusive rights to your territory, you’ll still likely deal with competitors from other brands. You need to know how many competitors in your area are selling the same (or similar) products to the same customers.

You must also analyze the market share of each competitor and their pricing structure. How much do they charge? Who is the company selling to? What products/services do they offer that overlap with yours?

Once you have this information, you can determine what you can do better and develop a sales and marketing strategy to outperform them.

The Franchise Disclosure Document and FA will likely contain some information on local competition and demand. However, I highly recommend diving a bit deeper using online tools, trade publications, and industry reports. You should also include this information in your franchise business plan.

Competition is not inherently bad. In fact, customers like having choices, and more competition in your area may actually be good for your long-term sales. Customers are more likely to head to a large shopping center with many different businesses and restaurant choices than a single restaurant with nothing else around.

Analyze Foot Traffic and Customer Access

Next, you should gather detailed data on your area’s customer demand, consumer habits, seasonality, and potential for growth. In this step of the franchise territory analysis, you’ll answer questions like “How many potential customers live in your area?” and “How often will they purchase your products?”.

Making sure there is a local demand for a franchisor’s products is only half the battle. You also need to make sure the exact location of your franchise is easily accessible and visible to customers.

Franchisees often undervalue the importance of analyzing foot traffic. For example, not all city center streets receive a lot of foot traffic. If you open a gas station franchise, even minor roadworks can impact your ability to do business, which is a big problem when most of your profits come through the sales of other value-added products. 

Ideally, you need a location that already attracts plenty of passers-by. It shouldn’t be easier for customers on foot to reach a competitor selling similar products to yours.

Assess Regional Economic and Regulatory Factors

Just like businesses, geographical areas can experience periods of growth, stagnation, and recession, making it essential to research the prevailing and future marketing conditions when analyzing a territory. Does the local customer base have the spending power to purchase your products? Are there any developments in the pipeline that could increase your customer base?

Speak with Existing Franchisees

I always suggest discussing your concerns and queries about franchising with existing franchisees. They can give you candid insights into how a franchisor establishes and enforces its territory rights. They can also offer their two cents on the pros and cons of exclusive and non-exclusive territory rights.

You might want to ask existing franchisees about any impact a new competitor has had on their business if they don’t have exclusive territory rights. You might find surprising benefits to having a stronger brand presence.

Understand Your Territory’s Growth Potential

In addition to population size and demographics, you should look for statistics and data on demographic shifts, current trends, and forecasts. Does the area have a thriving and growing economy attracting new businesses? Are there any infrastructure projects in development? Which local industries are on the rise, and how will this impact consumer habits and your competition?

I recommend gauging your potential for growth by examining census data, local city planning websites, regional B2B news sources, and other demographic analysis tools.

Examples of Good vs. Bad Franchise Territories

Here are some examples to help you understand when franchise territory works and doesn’t.

Good: Home Services Franchise in an Upscale Neighborhood

The home services sector is one of the fastest-growing franchising industries in the USA, with many businesses offering low-volume, high-margin services in upscale neighborhoods. You might find an opportunity in neighborhoods with dual-income households to open a franchise, such as a cleaning company.

Bad: Fast Food Outlet in a Declining Mall

You might be able to get what seems to be a good price on the rent in a declining mall, but low foot traffic could limit your ability to meet sales targets. If you purchase a restaurant franchise, make sure to conduct a thorough territory analysis and choose your exact location wisely.

Good: Coffee Shop Franchise in a Growing Suburb

Coffee culture is alive, well, and here to stay in the US and throughout the world. If you open a franchise territory in an area with an above-average-income, growing suburb with a large community of young professionals, you’ll likely find some success.

Bad: High-End Retail Franchise in a Low-Income Area

Some franchisees think they’re on to a winner when they find an area without a single competitor, neither for the same nor a competing brand. However, consumers in low-income areas often don’t have the disposable cash for high-end goods, leading to very few sales in high-end retail stores.

How to Negotiate with Your Franchisor for Better Franchise Territory Rights

Your franchise territory analysis is a valuable tool for negotiating your territory rights. You may be able to challenge unrealistic expectations and obligations if you don’t have exclusive rights to a territory. Alternatively, you might be able to request fairer terms if circumstances change, such as if a competing franchise opens near you.

If you want to negotiate exclusive territory rights, be prepared to put an attractive offer on the table. You’ll need to convince your franchisor that you can maximize sales in your area. If you leave gaps in the market and an area underserved, your franchisor stands to miss out on growth and profits. 

Armed with your franchise territory analysis, you might be able to negotiate key points such as:

• Encroachment protections
• Territory size 
• Growth rights
• Flexibility in territory boundaries based on performance and demographic changes

Don’t forget to review the territory clauses in your FA with a fine-toothed comb. One of the most common red flags I see is vague and subjective terms such as “reasonable proximity.” Also, look out for clauses that make your exclusive rights unclear. For example, does the franchisor classify kiosks and stores as separate franchise types?

Evaluate Your Territory and Maximize Success

Thoroughly analyzing your franchise territory is one of the best ways to set yourself up for long-term success. Before you start running your franchise, it’s important to understand your territory rights, local competition, and growth potential. I highly recommend conducting a franchise territory analysis as it allows you to tweak your strategy based on your locality and maximize your profitability from day one. I also recommend doing a franchise SWOT analysis, which we can also walk you through.

Ready to dive deeper into franchise research? Franzy has got your back. As a pioneering franchise platform, Franzy empowers franchisees like you with in-depth data and expert guidance to help you make smart, data-driven decisions. Start your franchise journey with confidence.