When reviewing the franchise agreement a prospective franchisee should pay careful attention to the territorial provisions contained in the agreement. It is important to protect yourself from territorial encroachment and competition from both the franchisor and other franchisees.
Territorial encroachment is a frequent complaint from franchisees. Usually this involves the franchisor granting a new franchisee a territory “too close” to an existing franchisee. Sometimes it involves an affiliate of the franchisor placing an affiliated franchise (selling similar products) too close to the existing franchisee. Unless the franchise agreement creates express protection for the franchisee’s defined territory, a court may be reluctant to find a franchisor encroached on the franchisee’s territory.
Be sure to review the territory provisions of the franchise agreement to make sure you have a protected territory. The Iowa Franchise Act does provide some protections against encroachment. The downside is that while these protections may help you in litigation the damage may already have been done when you get to that point. Moreover, there never any guarantees of success in litigation. Be proactive and discuss the territory provisions up front with the franchisor during the due diligence process.