Last week, we shared the importance of arbitration clauses in franchise deals. However, in terms of franchising, you must look after other aspects. As an independent business owner, you could face a growing threat that often goes unnoticed until it’s too late: franchise encroachment.
As large franchise chains expand aggressively, they can move into territories already served by local businesses, sometimes even impacting existing franchisees of the same brand. This practice can lead to lost customers, declining revenue, and, in some cases, the collapse of long-standing enterprises.
Whether you’re a small business owner or a franchisee, understanding how encroachment works and how to protect yourself against it is essential to preserving your market share and long-term viability. In this article, we’ll explore the risks of franchise encroachment, how it happens, and the strategic steps you can take to safeguard your business from being overrun.
What is franchise encroachment?
Franchise encroachment occurs when a franchisor opens a new outlet of the same brand too close to an existing franchisee’s location, resulting in overlapping territories and divided customer bases.
This practice can dilute market potential, decrease profits for existing operators, and generate tension between franchisees and the parent company. While franchisors may justify encroachment as part of a growth strategy or in response to market demand, it often leaves affected franchisees struggling to maintain revenue levels and customer loyalty.
Encroachment doesn’t always take the form of a physical store. It can also include delivery zones, online sales territories, or kiosk-style operations in nearby venues such as malls, airports, or convenience stores.
In some cases, as franchise attorneys in Miami, we’ve seen cases of encroachment by corporate-owned outlets that are placed within the original franchisee’s territory, which leads to a de facto encroachment, especially when the new outlet is better funded, advertised more heavily, or given operational advantages.
This issue is not exclusive to franchisees. Independent small business owners can also feel the effects when a major franchise moves into their neighborhood. With their extensive brand recognition, national advertising budgets, and supply chain efficiencies, large franchises can quickly draw customers away from local competitors, regardless of the latter’s quality or community ties.
Legal and contractual protections
As you may see, protecting your business from franchise encroachment begins with a thorough understanding of your legal and contractual rights. For franchisees, the franchise agreement is the most important document, as it outlines the rights and responsibilities of both the franchisor and the franchisee.
A well-drafted agreement should include detailed terms about territorial exclusivity, which can help prevent a franchisor from opening a competing location too close to yours. However, not all agreements guarantee exclusive territory, and some may contain vague or restrictive language that favors the franchisor.
If encroachment does occur, legal action is possible, but it’s rarely simple. Franchisees may seek remedies through arbitration, mediation, or litigation, depending on what the contract stipulates. Courts will typically refer back to the franchise agreement, so a strong legal position depends heavily on how clearly the terms are written and whether the franchisor acted in bad faith.
Independent business owners, on the other hand, may have fewer contractual tools at their disposal but can sometimes pursue legal recourse through claims of unfair competition or predatory business practices, especially if deceptive tactics were involved.
Strategic business responses
While legal action may offer some recourse, one of the most effective ways to protect your business from franchise encroachment is through strategic adaptation. Whether you’re an independent business owner or a franchisee facing internal competition, focusing on operational resilience and differentiation can help you maintain your customer base and thrive.
One of the most powerful tools at your disposal is the ability to strengthen customer relationships. Unlike large chains, local and established businesses often have deeper ties to their communities. By focusing on personalized service, engaging in local events, and maintaining consistent communication with loyal patrons, you can build a level of trust and familiarity that franchised competitors struggle to replicate.
Another important tactic is to enhance your unique value proposition. What sets your business apart from the competition? Whether it’s a specialty product, superior service, or a unique atmosphere, identifying and promoting these differentiators can shift customer focus away from brand recognition and toward quality and experience.
In some cases, you may also need to decide whether to collaborate or compete. If a new franchise location is introduced nearby, reaching out to the franchisor or fellow franchisee to coordinate marketing efforts or distinguish service offerings can help minimize direct overlap.
As you may see, there are options to protect and fight back against franchise encroachment. If you are in a similar situation, don’t hesitate to contact us; we have specialists who will be glad to assist you. Also, if you have found this article helpful, share it on social media and stay tuned to our blog.
