Beyond the Binder: Item 12 – Territory

When prospective franchisees think about "territory," they often imagine a clearly defined, protected area, one where they have exclusive rights to operate without competition from the franchisor or fellow franchisees. But the reality of Item 12 in the Franchise Disclosure Document (FDD) can be far more ambiguous, and far less protective, than most realize.

Let’s take a closer look at what Item 12 does and doesn’t tell you, and how to go beyond the binder to uncover the truth about your franchise territory.

Understanding Item 12

Item 12: Territory outlines what geographic area, if any, a franchisee will have rights to operate in. It is also where the franchisor must disclose whether:

• You will receive an exclusive or protected territory,

• The franchisor can operate competing outlets or sell through alternative channels (such as online or retail),

• They retain the right to change or reduce your territory under certain conditions,

• And whether other franchisees can serve customers in your area.

On the surface, it appears to be a roadmap of your market. But in practice, many Item 12 disclosures could be littered with loopholes, vague boundaries, and reserved franchisor rights that dilute any real protection.

What Must Be Disclosed

Under the FTC Franchise Rule, franchisors are required to disclose:

• Whether the territory is exclusive, non-exclusive, or protected.

• Specific conditions under which the territory may be modified or eliminated.

• Any limits on the franchisor’s or other franchisees’ ability to operate within your territory.

• Whether the franchisor reserves the right to sell products or services through other means (such as websites, mobile apps, national accounts, or third-party delivery platforms).

• Whether the franchisee may face competition from company-owned units, other franchisees, or third parties.

Some franchisors include a map or description with zip codes, counties, or mileage radii, while others refer to "development areas" with minimal detail. Some even make it conditional, stating that the territory will only be assigned upon lease approval or site acceptance.

The key? Franchisors are not required to offer exclusive or protected territories. They’re only required to disclose what the actual terms are.

Why It Matters

Territory protections, or lack thereof, can make or break a franchise investment.

• Encroachment risk: If your territory isn’t exclusive, the franchisor may open a competing location just down the street or allow another franchisee to do so.

• Revenue cannibalization: National deals, online ordering platforms, or delivery partnerships may let the franchisor profit from your market without compensating you.

• Lack of predictability: Vague definitions or conditions tied to performance benchmarks may leave your territory rights hanging by a thread.

• Loss of leverage: Without clear boundaries or rights, you may be powerless to challenge market overlap or competition from other channels.

Franchisors who retain broad rights to sell in or near your area often shift significant market risk back onto the franchisee, without reducing your financial obligations.

Real Due Diligence Tips

Here’s how to go beyond the binder and dig into what Item 12 really means for your investment:

✅ Ask for the actual territory map proposed for your location. If the franchisor says it’s “not available yet,” press for historical examples of similar territories.

✅ Request a list of all current franchisees and company-owned outlets within a 20-30 mile radius of your target area.

✅ Interview existing franchisees about encroachment issues, overlapping delivery zones, and competition from e-commerce or corporate channels.

✅ Clarify all reserved rights the franchisor has to bypass your territory through third-party sales, mobile ordering, or national partnerships. Ask whether you will be compensated for those sales.

✅ Negotiate protections, if possible. Some franchisees have been able to negotiate carve-outs or first-right-of-refusal clauses for new locations within their market.

✅ Look for vague language like “we may modify,” “at our sole discretion,” or “subject to satisfactory performance.” These are red flags that your territory rights are conditional or can be revoked.

✅ Understand renewal and transfer implications—territory rights can change when your agreement is renewed, transferred, or terminated. Get clarity now, not later.

The Bottom Line

Item 12 may seem like a technical detail, but it holds real-world consequences for your bottom line. Franchisees often assume they have protected rights to a geographic area, only to find themselves undercut by the same brand operating a block away; or worse, by the franchisor itself leveraging digital platforms to siphon away their customers.

Territory isn’t just a map; it’s a promise of market stability, operational control, and fair competition. Before you sign, make sure the promise isn’t an illusion.

Because once you sign that agreement, your rights are what’s in writing; not what was said in a Discovery Day presentation.