In all independent distribution systems, the issue of territory is always one of the most significant and pivotal elements of building a successful structure. I was at both ends of these equations, being a licensee and a franchisor, and doing good, bad and ugly elements of territory design. The question of whether to design territories on the basis of exclusive rights or non-exclusive rights is always big and requires careful thinking and planning.
Franchising development is the assignment of geographic areas to independent business owners who will own and manage franchise locations. Franchisees are interested in having exclusive rights to this area, while the franchisor is interested in maintaining control and free placement of units that they deem appropriate.
The problem of franchising or licensing is that there are several stages in the development of a franchise system. Phase I is the initial launch of the franchise organization. This constitutes the planning, paperwork and initial sales of the distribution model. Since the organization has not been tested and has not reached any critical mass level, the deductible is a hard sell. The first ten of them are often the most difficult, and it is at the first stage that there is a high probability that the franchise organization will not be able to develop any transaction. At stage I, it is usually recommended to use and implement an exclusive territory for the efficient sale of units. Without an exclusivity agreement, the first franchises provide no reason to join a small and untested franchise model.
In a very generalized sense, part II of the franchise system is that the model opened the first ten units and begins to reach critical mass. The critical mass allows franchisees to benefit from brand recognition, economies of scale, multi-market awareness and validation of the business model. It is at this stage that the franchise system can make the transition from a model based on an exclusive territory to a model of a primary responsibility area in which the franchisor controls the placement of units more. Of course, the franchisor has the greatest success, if the best interests of the franchisee are ahead of the rest. During Phase II, with an agreement providing for the franchisor’s control over how many units are included in a particular area, the success of the franchise system’s relations with the morality and principles of the franchisor.
When considering whether franchises should be followed by your business, it is important to look at the progress of the distribution system and take into account these different groups that the model must go through. These implications should play a role in the structure and design of the franchise agreement and franchise business model.
