Protected Territories as a
Development Tool
How Can You Maximize the Benefits
and Minimize the Costs?
Mark L. Bartholomay
Richard R. Leveille, Jr.
John W. Fitzgerald
Session Agenda
• Introductions and general background
• Practical issues and special
circumstances
• How does one franchisor approach the
issues
• Q and A
What are the Benefits?
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Encourages investment by franchisee
Promotes long term growth
Promotes inter-brand competition
Reduces intra-brand competition
May result in greater franchisee
profitability
What are the Costs?
• Eliminates intra-brand competition
• Risks slower development of the market
(sacrifices short term growth)
• Limits system development
• Potential limit on brand/market
penetration
What are Types/Styles of
Protected Rights?
• Express grant of exclusivity
• Selected exclusivity (exceptions for
special sites/customers)
• Restrictions on franchisor only (no more
co. or franchise-owned units)
• No restrictions on other units under
different brand/channels of distribution
Methods of Administration
or Enforcement
• Development schedules must be met
• Sales/unit quotas must be achieved
• loss of protection upon default in
schedule/quota
• loss of protection upon any default
Practical Traps/Issues/Tools
• Definition of the protected territory:
radius, maps, population,
households, zip codes,
municipalities
• Impact policies
• Mapping software
Everyday Issues with
Radius Restrictions
• Special event vending
• Special venues
• Delivery or install in another
franchisee’s territory
• Similar products under another brand
How Do You Negotiate
Restrictions?
• To some degree or another you don’t
• Today’s numbers or tomorrow’s
• Franchisee usually knows the market
better
• There are regional differences
How Do You Handle a
Dispute?
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Negotiation
Council meeting and/or site survey
Arbitration
Lawsuit
What Are the Norms Today?
• Carve-outs for internet
• Ancillary branded products are usually
exempt
• Gift cards are sometimes excluded
• National contracts are very often
excluded
What About Advertising in the
Protected Area?
• Sometimes not discussed
• Can have an impact regardless of who
pays
• Is there a right to approve the content?
Is There a Natural Trend in the
Way a Strategy is Developed?
• Usually the restrictions tighten as a
concept matures
• There are different levels of concerns in
each organization
• A lot is driven by market size
requirements and franchisor’s desires
• In the end, almost everyone becomes
real
How Does the Development
Flow Impact the Discussion?
• If separated by a road, which side is
developed first?
• What if the exclusivity is lost?
• Who gets first shot if multiple
franchisees are available?
• Can you pick your neighbors?
Do You Want Restrictions and
How Can You Make Sure They Are
Manageable?
• Everyone should want them
• They are protection for both sides
• If they are realistic, they are of great
benefit
• If they are not reasonable … RUN!
One Franchisor’s Approach
• The Smoothie King Story
Current Stats on
Smoothie King
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Originated in 1973
Franchising in 1989
400+ Units in US
38 States
13 Units in Korea
2006 = 80+ New Units
Smoothie King History
• In the very beginning:
– 5 year agreement
– Renewal at the sole discretion of the
Franchisor
– No protected territory at all
– Only protection was the store address
Smoothie King History
In the real beginning
there was no
standard deal…
Smoothie King History
Negotiation became
the standard
Smoothie King History
• As became more confident, we got back
to the standard deal…
• No Protected Territories
Then comes…
Encroachment Litigation
• Became publicly aware
• Franchisee candidates started to
question our “standard deal”
• We knew that change was inevitable
Changes (approx. 1994)
• Protected Territory
• Protection against the Franchisor
establishing another franchised or
company owned unit within a
geographical trade area of the closest
30,000 people (raw population)
• In 2000 we changed this to 15,000
Agreement Language
Upon Franchisee securing a lease for the
Location and prior to the store opening,
Franchisor shall designate a
geographical area surrounding the
Franchised Business, to be described in
Attachment A (the "Protected
Territory").
Agreement Language (Pg. 2)
Subject to the following, Franchisor will
not establish or operate Smoothie King
Units, nor grant a franchise to any
person other than Franchisee to
establish or operate Smoothie King
Units under the System and Proprietary
Marks in the Protected Territory.
Agreement Language (Pg. 3)
Franchisor may establish, operate or grant a
franchise or license to others to operate
Smoothie King Units under the System and
Proprietary Marks at any “Special” location,
as defined below, or sell product or service
lines through other channels of distribution,
within and outside the Protected Territory at
any time, including those activities described
in Section 8.3.6.
Agreement Language (Pg. 4)
Special locations are defined as locations that Smoothie
King determines have a restricted trade area
(“Special” locations). Examples of Special locations
include locations in the following types of
environments: malls, universities, schools, hospitals,
military bases, casinos, convention centers, arenas,
stadiums, airports, health and fitness facilities, office
buildings, theme parks, amusement facilities and
other locations that are not located on the street and
the primary trade area is restricted to certain trade
generators.
Agreement Language (Pg. 5)
For Smoothie King Units that are not located at
Special locations, the Protected Territory will
be defined by identifiable boundaries and
include a business, seasonal and/or
residential population count of approximately
fifteen thousand (15,000) people, based upon
then-current Smoothie King site selection
data.
Agreement Language (Pg. 6)
The boundaries of the Protected Territory may
be shaped, at Franchisor's sole discretion, to
match the population criteria, street or walk
by traffic patterns and natural geographic
features, such as bodies of water, interstate
highways and other features that normally
define guest trip patterns.
Agreement Language (Pg. 7)
The Protected Territory may include a business,
seasonal and/or residential population count
of less than fifteen thousand (15,000) people
where there is less than 15,000 people within
a two mile natural trade area of the location,
based upon the criteria above, such as in
suburban, rural, or beach communities.
Example A
• 30,000 pop
• Boundaries very
clear
• Streets labeled
• Store location
accurate
• Coordinates
available
• Accurate Demo’s
Example B
• 30,000 pop
• Boundaries very
clear
• Streets labeled
• Store location
accurate
• Coordinates
available
• Accurate Demo’s
Example C
• 15,000 pop
• Boundaries very
clear
• Streets labeled
• Store location
accurate
• Coordinates
available
• Accurate Demo’s
Example D
• 15,000 pop
• Boundaries very
clear
• Streets labeled
• Store location
accurate
• Coordinates
available
• Accurate Demo’s
• Prepared by a
third party
Things to Consider
• Market Planning
– You need to know where you need to
penetrate prior to drawing protected
territories.
– You must analyze the market prior in
advance of growth.
– If not, you could hurt your ability to expand
the brand responsibly.
DFW Expansion Plan
Houston Expansion Plan
Things to Consider
• Software
– There are many packages available
• Scan/US
• Microsoft Mapoint/Streets & Trips
• Google Earth
• In-House or Outsource
– Maponics (www.maponics.com)
• Real Estate Knowledge
Protected Territories
Q and A