Choosing the territory for your franchise

If you decide to invest in a franchise, one of the most important decisions you will have to make is which territory to purchase, says Anthony Round, business development manager at Papa John’s

A franchise territory is a geographical area associated with a franchise. The franchise licence purchased will offer exclusive rights to operate within the allocated region.

If you buy a franchise where you are out on the road visiting customers, the region will be mapped out clearly or allocated by postcode or town. Similarly, if you buy a franchise for a static location, like a shop, you would not expect your franchisor to sell a licence to a new franchisee setting up next door. Therefore, again a geographical area will be assigned to that outlet.

Size
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The size of territories vary significantly between franchises and region. Franchisors will carefully calculate the amount of ‘business’ in a given area, depending on its market, to ensure each franchisee can make a healthy income from the territory area.

However, there will inevitably be variation in potential profitability between areas and research on your part will help assess the likely revenue of one territory over another. For example, more highly populated areas usually have a larger target market of customers, while some towns are more affluent than others and so customers will have more available purchasing power. Franchisors often take this into consideration, so territories in London are usually smaller than those in more rural areas, for example.

There are other aspects to take into account as well. Although turnover is likely to be higher in an affluent, highly populated area, it must be remembered that costs are also usually higher, as premises and staff tend to come at a higher price in these areas.

If you live in an affluent area, you may need to earn more as your personal outgoings will also be higher because of the increased cost of your home, compared to living in a less expensive area. Therefore, a franchise in a more ‘out of the way’ region may have a lower turnover, but you could end up with more cash in your pocket at the end of the day. This kind of information needs to be considered carefully before you choose a suitable territory.

The overriding element that influences territory choice is where a potential franchisee lives. If you need to travel a long distance to get to your place of work every day, this eats into your time and, as we all know, time equals money. For this reason, most franchisees look for a business close to where they live. This has the further advantage of existing market awareness, as they know the area and the types of customers they will be selling to and can therefore confidently tailor their offering to appeal to this marketplace.

A case in point is Luigi Forgione, our franchisee for Hertfordshire. When he opened his second Papa John’s outlet last summer in Broxbourne he was familiar with the region, as it is close to where he lives. He was quick to realise the store would attract a family focused clientele. Responding with family meal deals, he’s seen profits rapidly increase since the store’s launch.

Competition
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In addition, selecting a franchise in an area you are familiar with means you can research the competition easily. You can even try their offering to see how you can provide a better service as a franchisee. This may sound cheeky, but it is necessary to understand how your franchise offering will be perceived in the marketplace compared to your competition.

The other area for consideration when selecting a suitable territory is if you are purchasing a resale or a virgin territory.

A virgin territory is an area where the franchise licence hasn’t been operated before. This has both advantages and disadvantages. On the plus side, you are looking at untapped potential, so have the chance to cash in before anyone else can. Customers always like something new and the uniqueness of your offering may catch their attention.

However, the challenges include the fact the business is unknown. You cannot look back at the accounts of the previous franchisee to evaluate performance, so it is hard to predict how well your franchise will do in financial terms. On top of this, awareness may be lower in the marketplace. With a virgin territory, you would expect additional support from your franchisor to help you get up and running quickly.

Resale territories also have pros and cons. A resale area is one where a franchise has been operating, but the franchisee has decided to sell the business. The main advantage is that you are able to get a snapshot of the current health of the franchise you are buying. The accounts will be available and you can evaluate how well the franchise has done so far.

However, it is important to find out why the franchisee is selling. Personal reasons or retirement are acceptable, but if the franchisee is selling because the business is doing badly then some serious research needs to be undertaken. There may be good reasons why the franchise is underperforming and you could grab a bargain - or you might just be about to make a mistake.

With an underperforming franchise, try the service yourself to see if there is a reason why customers are not choosing to use the business. Talk to your potential franchisor. Why does it think the business is underperforming and what will it do to help you turn it around?

Valid reasons for underperformance may include an unmotivated franchisee, someone with ill health, badly trained staff or who has failed to follow the tried and tested franchise model. Alternatively, is there something about the franchise a new owner will not be able to change - is the territory badly located, for example?

Healthy
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On the other hand, once you have reviewed the accounts of a resale territory you may be very happy to take it on. Profits may be good and the franchise will bring you a healthy living. In this case, be sure there is still some room for growth and development, because if your franchise is standing still you are actually going backwards. This is because fixed and variable costs will always continue to rise with inflation, plus you will inevitably loose some customers for any number of valid reasons, so income also needs to grow continually to accommodate this.

If you have found the ideal franchise, but there is not a suitable available territory, don’t be afraid to talk to the franchisor. The company may have a franchisee that has indicated they are considering moving on or retiring, but the business has not been put up for sale yet. Or the franchisor may be able to discuss other options with you.