A potential risk occurs when a franchisor is permitted to open a competing location right next to your franchise. This possible encroachment may be permittable depending on factors such as the language in your franchise agreement and governing state law. When your franchisor sets up shop nearby, you may face reduced profits, decreased customer traffic, and a significant threat to your investment. To protect your income, you first need to understand what this practice means for your business.
Understanding the dangers of encroachment
Business encroachment can occur when a franchisor opens a new location too close to yours. Their location can pull customers away and reduce your sales. Additionally, it can splinter the customer loyalty you built over the years. This creates unfair competition within the same brand and adds pressure to your business. Thus, understanding your territorial rights, or lack thereof, can help you determine how much risk this potential threat poses.
Your territorial rights as a franchisee
Territory rights define your operational area and directly address potential encroachment by other franchisees or franchisor-owned locations. Fortunately, the Federal Trade Commission requires franchisors to disclose whether you get an exclusive area. Additionally, the franchisor must also explain when they can change your territory rights. This is designed to inform you of your protections from the start.
The two types of territories that you need to know
Your territory rights also decide whether you can stop encroachment before it happens. Hence, you should check your franchise agreement if it grants you one of the two territory types below:
- Exclusive territory: Your agreement guarantees you operate as the only franchisee in a specific geographic area, such as a five-mile radius around your location.
- Non-exclusive territory: Your franchisor can place other franchises anywhere, including directly next door to your business.
These differences make all the difference in protecting your investment. Once you understand which territory type you have, you can take the right steps to defend your business rights.
Protect your business from unfair competition
You have rights as a franchisee that you must actively protect. Your franchise agreement explains your territorial protections and business rights clearly. Start by reviewing your contract carefully to identify what protections you have.
If encroachment violates your agreement, you can take action to defend your territory. Many franchisees find that professional guidance helps them work through complicated franchise agreements and protect their investments.
NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post