Do Franchises Limit Competition?

The franchise will generally give you a territory in which you may operate and the franchisor agrees not to allow anyone else to open one of their franchises in your territory. However, they have no control on competing franchisors opening up a franchise in your territory (for example, if you own a Subway franchise, a Quiznos store may very well open across the street), and they have no power to keep independents with the same type of business from opening in your area.

Two other things you need to watch out for are the size of your territory and that any verbal territorial claims or promises actually get included in your final contract. No matter how helpful and friendly the company may be, when push comes to shove, the only thing that matters is what it says in the contract.

A franchisee for a company that sells products to a very specific niche market learned that lesson the hard way. He signed a contract with the franchise to open a store in a suburban East Coast community. His contract with the franchise stated that competing stores had to be located at least 7 miles away from one another. When he questioned whether this allowed proximity might hinder business, he was shown figures indicating that stores in a nearby city were profitable even though they were that close together and was also told the franchise company wasn't planning to open any other stores in his state for three years. Thus, they said, he would have plenty of opportunity to build his business and become established.

Less than a year later a second store from the same franchise company was opened in the area. The store was more than 7 miles away from the first one but close enough to seriously cut into the business. Warns the owner, "Buyer beware. A seven-mile territory in a densely populated city may be fine, but seven miles is nothing for some kinds of businesses in the suburbs. You wind up doing the advertising for the other store."