In all independent distribution systems, the question of territory is always one of the most significant and fundamental elements to build a successful structure. I have been at both ends of this equation, as a licensee and a franchisor, dealing with the good, bad and ugly elements of territory designation. The question of whether to designate territories on the basis of exclusive or non-exclusive rights is always important and requires careful thought and planning.

Franchise development is the assignment of geographic areas to independent business owners who will own and operate franchise system locations. The franchisees have an interest in owning exclusive rights to the area, while the franchisor has an interest in maintaining control and the freedom to place the units where they see fit.

The problem with licensing or franchising is that there are several phases in the development of a franchise system. Phase I is the initial launch of the franchise organization. This constitutes the initial planning, paperwork, and unit sales of the distribution model. Because the organization is not validated and has not achieved any level of critical mass, the franchise is a difficult sell. The top ten are often the most difficult and it is during Phase I that there is the greatest chance that a franchise organization will fail to develop any traction. It is during Phase I that it is usually recommended to use and implement an exclusive territory to effectively sell units. Without the exclusivity of the deal, early franchisees have little reason to join a small, untested franchise model.

In a very general sense, the Phase II part of a franchise system is after the model has opened the first ten units and is starting to reach critical mass. Critical mass allows franchisees to benefit from brand recognition, economies of scale, multiple market awareness and business model validation. It is during this phase that a franchise system may transition from a model based on an exclusive territory to one based on a primary responsibility area where the franchisor maintains greater control over the location of the units. Of course, a franchisor is most successful if the best interests of the franchisees come before anything else. During Phase II, in which the agreement provides the franchisor with control over how many units go to a particular area, the success of the franchise system depends on the morals and principles of the franchisor.

When considering franchising your business, it is important to look at the progression of a distribution system and take into account these different phases a model must go through. These implications should influence the structure and designations of the franchise agreement and the franchise business model.