Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchise Territories Are Getting Smaller
Transcript
- Lucas: If you are looking at buying a franchise, there is a quietly terrifying clause buried in almost every franchise agreement these days. It is the territorial rights clause — or rather, the lack of one. Luna: Terrifying how? Are we talking about the brand opening another unit next door to yours? Lucas: Exactly that. And it is happening more and more. In the past five years, a growing number of major franchise brands have been shrinking their exclusive territories — or eliminating them altogether. The old model where a franchisee got a protected five-mile radius is disappearing. Luna: So you could invest a million dollars into building a location, and then the franchisor could approve a second location three blocks away? That sounds like a recipe for conflict. Lucas: It is. And it has been the subject of several high-profile lawsuits. But here is the thing — from the franchisor's perspective, shrinking territories makes economic sense. Denser networks drive higher brand awareness and lower supply chain costs. And for the franchisor, same-store sales growth often comes from compressing the map. Luna: Let's talk about a concrete example. I remember reading that chick fil a, which is famously hands-on with site selection, has been clustering stores incredibly tight in some markets. Lucas: Right. chick fil a is the poster child for density over territory. In Atlanta, they have stores less than two miles apart in some corridors. And the company owns every location — they don't franchise in the traditional sense. But the lesson applies. They proved that a high-quality brand can cannibalize its own units and still grow total revenue. Luna: But for a franchisee who owns their store under a traditional model, that cannibalization is a direct hit to their income. So what is actually happening in the franchise world? Lucas: A few things. First, many newer franchise agreements are moving away from exclusive territories altogether. Instead, they offer a 'protected area' that is defined by a radius — but the radius is often small, like one mile, or it is based on population density, like a certain number of households. And those can change over time. Luna: So the franchisee is basically renting the right to operate in a location, not owning the market. Lucas: Exactly. And the second trend is that even when a territory is exclusive, the franchisor often reserves the right to operate alternative channels — like delivery-only kitchens, mobile units, or even online ordering hubs — inside that territory. So your exclusive radius doesn't protect you from a virtual store two blocks away. Luna: That feels like a bait and switch. You sign thinking you have a five-mile buffer, and then the brand starts opening ghost kitchens inside your turf. Lucas: It has happened. Subway faced a major class-action lawsuit a few years back over precisely this issue. Franchisees argued that Subway was approving new locations too close to existing ones, violating their implied territorial rights. Subway settled, but the settlement didn't stop the practice. The brand just got more careful about how it defined territories in new contracts. Luna: So what should a prospective franchisee look for in the franchise disclosure document? Lucas: First, look for the exact language around 'protected territory' or 'area development agreement.' If it is not explicitly stated that you have an exclusive radius, you don't. Second, check for any carve-outs — like the franchisor's right to open company-owned stores, kiosks, or online ordering hubs. Third, ask about the brand's historical behavior. Have they opened competing locations near existing franchisees in the past? Luna: That last one is hard to find in the FDD alone. You'd have to talk to current franchisees. Lucas: Yes. And that is exactly what you should do. Call five existing franchisees in different markets and ask them directly: 'Has the brand ever opened a store within your territory without your consent?' If the answer is yes more than once, that's a red flag. Luna: I've also noticed that some brands are now offering 'area development agreements' that require the franchisee to open multiple units within a defined region. That flips the dynamic — instead of you protecting a single store, you're now responsible for covering the territory yourself. Lucas: Right. That is another trend. Brands like Dunkin' and Taco Bell have moved heavily toward multi-unit development commitments. They want franchisees who will open five or ten stores in a given area. That way, the brand gets density, and the franchisee gets scale — but only if they have the capital and the operational bandwidth. Luna: So the takeaway for someone listening who is considering a franchise: assume your territory is temporary. Plan your business model around the possibility that a competitor — from the same brand — could open nearby. Lucas: Exactly. And if the brand is publicly traded, you can also look at their investor presentations. They often brag about 'unit density' and 'penetration rates' as growth metrics. That tells you exactly where their priorities lie. Luna: If today was actually useful to you — if you are walking away with a clearer sense of what to look for in a franchise agreement — the way these conversations stay ad-free is through listener support. It is buy me a coffee dot com slash fexingo. That's it. No upsell, no premium tier. Lucas: Yeah, and we mean that. This show exists because people who find value in it chip in a few bucks. It keeps us independent and means we never have to twist a topic to please a sponsor. So if you got something out of this episode, that link is a simple way to keep it going. Luna: Back to territories though — one more thing I think is worth mentioning. There is a growing movement among franchisee associations to push for more transparent territory clauses. Some are even lobbying for state-level disclosure requirements. Lucas: That is a good point. A few states already have franchise relationship laws — like Iowa, Wisconsin, and California — that impose certain good-faith requirements on franchisors. But territory protection is not explicitly guaranteed anywhere. So it is up to the franchisee to negotiate. Luna: Negotiate? Most franchise agreements are take it or leave it. Especially for first-time franchisees. Lucas: True. But if you are a multi-unit operator with a strong track record, you have leverage. Some brands will negotiate territory exclusivity for a committed development schedule. And if you are buying a resale franchise, you can sometimes inherit the original territory terms — which might be more favorable than what new franchisees get today. Luna: That is actually a smart angle. Buying an existing franchise might get you a grandfather clause on territory. Lucas: Yes. And that is one reason franchise resales have become more popular — we did an episode on that a few weeks back. But even with a resale, you need to check whether the territory clause is transferable and if it expires with the original agreement. Luna: So let's land this. The core lesson: before you sign, know exactly what geographic protection — if any — you are getting. And assume that protection will erode over time. Lucas: And if you are already a franchisee and you see the brand approving new locations nearby, your best move is to get organized with other franchisees. Collective pressure is sometimes the only thing that works. A single franchisee suing is expensive and risky. A group of franchisees raising concerns — that gets attention. Luna: All right. That is a good place to leave it. Next episode we'll look at something a little more optimistic — maybe the brands that are actually expanding territories and investing in franchisee success. Lucas: There are some. We will dig into which ones and why. Thanks for listening.