When you purchase a franchise, it\u2019s 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.<\/p>\n\n\n\n
A franchise territory analysis allows you to look into an area\u2019s demographics and consumer habits, existing and emerging competition, and growth potential. Just as crucially, you can determine whether your franchisor\u2019s territory terms and expectations are fair and realistic.<\/p>\n\n\n\n
In this post, I\u2019ll explain the differences between the main types of territory agreements and break down how to perform a franchise territory analysis.<\/p>\n\n\n\n
After entering into a Franchise Agreement (FA)<\/a>, 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.<\/p>\n\n\n\n When performing your franchise territory analysis, you\u2019ll 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.<\/p>\n\n\n\n I should note here that in most cases, it\u2019s the franchisor that assigns a territory to the franchisee<\/strong>. While your territory analysis may give you some room to renegotiate the fine print of your FA, you don\u2019t generally get to choose your territory. <\/p>\n\n\n\n That said, even if you can\u2019t 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.<\/p>\n\n\n\n Many new franchisees overlook this task, but it\u2019s one of the most effective ways to gauge a franchise\u2019s potential and ensure your location drives sales<\/a>.<\/p>\n\n\n\n Before I explain how to actually perform a territory analysis, it\u2019s 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\u2019s a little more to it.<\/p>\n\n\n\n If you have the exclusive right to a territory, no other franchisee for the same brand can operate in your designated geographical locations. <\/p>\n\n\n\n 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.<\/p>\n\n\n\n However, only being able to operate in certain territories can limit your own potential for growth. And having exclusive rights to a territory doesn\u2019t necessarily mean you can expect more sales.<\/p>\n\n\n\n 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\u2019t meet the franchisor\u2019s targets, you might be setting yourself up for a stressful business venture, to say the least.<\/p>\n\n\n\n If you don\u2019t 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n If you don\u2019t 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The size and location of your territory will greatly impact your franchise\u2019s 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.<\/p>\n\n\n\n You need to thoroughly understand your territory\u2019s boundaries, not just have a rough idea of the areas you\u2019re 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?<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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\u2019ll 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.<\/p>\n\n\n\n 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?<\/p>\n\n\n\n Once you have this information, you can determine what you can do better and develop a sales and marketing strategy to outperform them.<\/p>\n\n\n\n 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<\/a>.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Next, you should gather detailed data on your area\u2019s customer demand, consumer habits, seasonality, and potential for growth. In this step of the franchise territory analysis, you\u2019ll answer questions like \u201cHow many potential customers live in your area?\u201d and \u201cHow often will they purchase your products?\u201d.<\/p>\n\n\n\n Making sure there is a local demand for a franchisor\u2019s 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.<\/p>\n\n\n\n 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. <\/p>\n\n\n\n Ideally, you need a location that already attracts plenty of passers-by. It shouldn\u2019t be easier for customers on foot to reach a competitor selling similar products to yours.<\/p>\n\n\n\n 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?<\/p>\n\n\n\n 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.<\/p>\n\n\n\nExclusive vs. Non-Exclusive Territory Rights Explained<\/h2>\n\n\n\n
Exclusive Territory Rights<\/h3>\n\n\n\n
Non-Exclusive Territory Rights<\/h3>\n\n\n\n
How to Conduct a Franchise Territory Analysis<\/h2>\n\n\n\n
Define the Territory Parameters within Your Franchise Agreement<\/h3>\n\n\n\n
Evaluate Competition in the Area<\/h3>\n\n\n\n
Analyze Foot Traffic and Customer Access<\/h3>\n\n\n\n
Assess Regional Economic and Regulatory Factors<\/h3>\n\n\n\n
Speak with Existing Franchisees<\/h3>\n\n\n\n