The Franchise Disclosure Document (FDD) Item 12

27.03.23 08:52 PM By Stacey Riska

The Franchise Disclosure Document (FDD) Item 12

We are going to be looking at Item number 12 of the FDD, the Franchise Disclosure Document, what it’s about, and why it's important. If you have been following along we've done the previous ones Items 1 to 11. So please go back and check those out. They build up to some of these later items that we're getting into now. Item number 12 is really important for those types of franchises where there is a built-in territory, meaning there's a geographic area attached to what you're acquiring and where you are able to do business with your franchise.

This is really broken down into a few sections in this particular item. 

  • Section number one is the description of the territory

  • Section number two is competition

  • Section number three is territory protection, we'll call it that. And what happens if and how can you or can you at all do business outside of your territory? 

  • Section four is territory expansion. Can the territory ever be expanded?

So with that, we are going to provide some feedback about how our franchise handled territories, and the answer is they didn't because in this particular franchise there were no territories. There are many franchises that don't have territories or there are some that they're national in scope. Let's say you're doing business-to-business and so, therefore, you could work in businesses all over the country. So there are no territory restrictions, but that would be outlined in this item. 

What you want to really understand is how is your territory defined. Is it by radius? Is it by zip code? It really needs to be delineated and described. For example, we work with a franchise that will outline how many households, and what income qualifications are considered part of that territory. And it's just so important to know this because that's how they're going to zone out your area, ensuring that no other franchisees who may invest in the franchise or stampeding or coming into your territory.

The next area of this item is competition. And this is an interesting one also in that it doesn't really define what you can do as far as your competition with your true competition, which is other businesses that do the same thing you do. This really has to do with internal competition within your territory and what you can and you can't do. Is that correct?

There are two parts to it. So once your territory is defined, then the second part that we are alluding to is, is it exclusive or non-exclusive? Meaning can anybody else come in? And that could be another franchisee and/or it could actually be the franchisor. So the franchisor may have language in there that they have the right to come in and place a territory. 

A weird example of this may be, let's say you are in a business something like ours, food and food and beverage. A lot of those concepts tend to be more typical brick-and-mortar. And the franchisor may have an opportunity to come in and be in a non-traditional place like an airport or a hotel or a military base. If you don't take that opportunity, even if it's in your territory, then there's probably language in this item saying that the franchisor and or another franchisee can come in and open up in that location even though it's part of your territory.

The next section would likely be territory protection. So, competition and protection kind of overlap a lot as far as their meaning on what it is and how it's described in the FDD

The last one is territory expansion and the territory that you're acquiring, can it ever be expanded? Can it grow for you? Is it configured that if they have no other franchisee that comes in near you, can your territory include other zip codes or another area or something like that? 

So, hopefully you can see the whole idea of territory is really important because in just a few examples we've gone through and you can see where these situations could easily arise. You want to understand what your rights are, what your obligations are, and what if any processes you need to follow. Think about what if you are growing so fast and you outgrow your business facility and you need to relocate? Well, what is the process for doing that? What if you want to add on another territory one year in when you're confined to your current franchise agreement? What is the process for doing that? So making sure you understand everything related to territory, you will feel a lot more comfortable if those situations arise later (which they often do).

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 Author Bio

I’m Stacey Riska aka “Small Business Stacey”, your franchise placement specialist. I help aspiring business owners find the PERFECT franchise so they can get to the next level in life and business.
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