Exclusive vs. Protected Franchise Territories

In franchising, territorial rights play a central role in shaping the relationship between franchisors and franchisees. These rights determine where franchisees can operate, the level of competition they face, and how a brand can grow. While territorial structures vary widely, most systems rely on exclusive or protected territories, with a trend toward less exclusive ones. Understanding the differences between these two models is essential for evaluating franchise opportunities and negotiating territory rights.

Overview: Exclusive vs. Protected Territories

Franchisors throughout the industry offer both exclusive and protected areas. While each aims to minimize competition and provide a viable market for the franchisee, exclusive territories offer the greatest protection. Exclusive territories can limit a franchisor’s ability to expand the brand’s presence and adapt to changing market conditions. For this reason, franchisors have grown to prefer granting protected territories over exclusive territories.

Under a protected franchise territory, the franchisor agrees not to establish any additional franchised or company-owned units of the same brand in that territory. This shields the franchisee from direct intra-brand competition, but does not guarantee full exclusivity. Franchisors or other franchisees may still engage in certain competitive activities within the protected area. Common examples include:

• Online and e-commerce sales;
• Wholesale distribution to third-party retailers (e.g., supermarkets or convenience stores);
• Operation of alternative brands or private labels within the same industry;
• Non-traditional outlets or locations (e.g., airports, grocery stores, bookstores, universities, or hospitals), even when located within a franchisee’s territory, and
• National accounts (e. g., certain customers that are big enough to merit the franchisor’s attention and reserve the right for the franchisor to manage the relationship).

Protected territories provide a competitive middle ground, offering franchisees some protection while giving franchisors greater flexibility to expand the brand and adapt to market changes. As a result, protected territories have become more common than exclusive territories. 

Territory rights, including whether a franchisee receives an exclusive or protected territory, are outlined in Item 12 of the legally required Franchise Disclosure Document (FDD) and further detailed in the franchise agreement.

Key Differences Between Exclusive and Protected Territories

Exclusive Territories

An exclusive territory provides franchisees the sole right to operate within a defined geographic area. Typically, neither the franchisor nor other franchisees may establish a competing business in that territory, providing the franchisee with the highest level of protection against intra-brand competition.
Exclusive territories have become less common because they limit a franchisor’s ability to expand and respond to market demands. Franchisees may have more success negotiating exclusivity when committing to significant monetary investments or substantial multi-unit development within a given territory. In the absence of these circumstances, franchisees may negotiate options or rights of first refusal to expand into adjacent territories.

Protected Territories

Protected territories ensure that no other same-brand franchised or company-owned unit will be placed within the defined area. However, they do not prohibit competitive activity. For example, Franchisors often reserve the right to:

• Sell products or services online;
• Distribute products wholesale to retailers;
• Operate alternate brands;
• Open units in non-traditional venues, such as airports or universities; and
• Manage larger national accounts directly.

Not all protected territories are structured the same. Franchise systems may vary significantly in the protections offered, making a careful review essential for prospective franchisees.

Franchisor’s Competitive Activities Within Territories

Regardless of whether a territory is exclusive or protected, franchisors may retain certain competitive rights. Common examples include:

• Online sales: Direct-to-consumer e-commerce operations;
• Wholesale distribution: Sales through supermarkets, convenience stores, or other retailers;
• Alternative brands and private labels: Multiple brands under the same franchisor operating in overlapping areas;
• Non-traditional outlets: Locations, such as airports, grocery stores, bookstores, universities, or hospitals; and
• National accounts: Large clients handled at the franchisor level, with certain work assigned to franchisees as needed.

Territory structures are a critical element of any franchise relationship and can significantly affect both the franchisee’s competitive environment and the franchisor’s ability to grow and expand. Exclusive territories offer strong protection but limit brand expansion, while protected territories strike a balance between franchisee security and franchisor flexibility. With the industry’s continued shift toward protected territories, prospective franchisees should carefully review Item 12 of the FDD and understand the rights and limitations of their territory before entering into any agreement.

For more information on how this affects your business, contact your Varnum franchise attorney.