Territorial Exclusivity: Protecting Everyone’s Rights By Kevin Lewis

But every brand eventually reaches the saturation point—the result of a growth pattern that wasn’t properly planned or that didn’t consider the ultimate consequence of excessive and renegade growth: Failed units. And when units fail, the franchisor receives less revenue, which affects available funds for marketing and advertising programs, which leads to reduced occupancy—leading to more failed units.
Recognizing this potentially devastating domino effect, most franchisors have agreed to include territorial-exclusivity clauses in their franchise agreements. In fact, in a recent survey of franchisors of all kinds, 71 percent said they offer exclusive territory-development rights to their franchisee partners.

Even more prevalent today is the master franchise agreement, in which a developer or group of developers is granted the rights to develop a specified number of units in a defined geographical territory. In the hotel business, the size of the protected territory can range in size from 50 miles in rural areas to a mere city block in urban areas such as Manhattan or Chicago.

The good news about territory-development agreements is that they are completely negotiable. Because both franchisors and franchisees now recognize both parties must prosper for both to succeed, each has become more willing to hammer out a fair agreement that will contribute to everyone’s success.

A few things to remember when negotiating your next territory-development clause:

• Communicate early and often. The best agreements are those in which both parties communicate their concerns and create a deal via mutual decision. Before any contracts are signed, franchise partners should have a series of open and honest discussions about each party’s responsibility in the franchise relationship. Also, continue the dialogue throughout the relationship so if any territory issues do come up, they have already been discussed and resolved, eliminating the need for arbitration.

• Markets change. Keep in mind that markets are continually evolving, that what made sense five years ago in a certain location might not work today. Do your homework and find out as much as you can about the market you plan to compete in. Make sure you are familiar with the Interstates around your proposed property, and take note of geographic landmarks that might affect your market draw, today and tomorrow. Don’t just look at what’s there currently, but consider what might happen in the future: Is there an interstate planned that will re-route potential customers away from your property, for instance? Does the transportation department have a new off-ramp planned that will redirect your customers? Know what else is planned for the area, including new restaurants, shops or residential communities.

• Know what is covered. If your franchisor has multiple brands, be sure you understand which brands are covered by the territory clause and which ones are not. In many cases, the delineation is made by price points, i.e.: a brand with a more expensive room rate might be excluded from a clause for a property with a more bargain rate. Knowing this can affect your marketing plan down the road. In the extended stay market, the general rule of thumb is no competing properties within a three to five mile radius.

• Consider a third-party report. Use the Business Impact Study process if you believe a proposed property might impact your own business—even if it is outside your protected territory. This involves a quick marketing study that determines how much the existing property will be affected by the new property. If the impact is deemed to be less than 5%, the property is likely to move forward; if the projected impact is significantly more, the franchisor has several options: Not build the new unit, award the new unit to the existing franchisee or provide financial aid to the impacted franchisee for a specified period after the new unit opens. In some extreme cases, the franchisee can use a third-party arbiter to resolve the conflict.


Finally, remember that the territory agreements are pre-negotiated and cannot change once they have been agreed upon and signed. Be sure to have your attorneys review all contracts to be sure they are in your best interest.

Kevin Lewis is president and CEO of Suburban Franchise Systems, Inc. (SFS), a franchisee-owned company with 63 Suburban Extended Stay Hotels operating in the United States. For more than a decade, Lewis has been involved with established and start-up franchise companies. (klewis@suburbanhotels.com)

Logos, product and company names mentioned are the property of their respective owners.

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