The Art and Science of Franchise Research: Territory Research

Figuring Out The Size of The Industry in Your Territory

Almost every franchise has a territory defined in the Franchise Agreement—the contract you sign with the franchisor. This territory protects your business area from other franchisees or restricts you from operating elsewhere. Often, you can operate outside your territory until another franchisee buys that area, after which you must transfer the business to them.

How Territories Are Defined

Territories typically use metrics important to the franchise—such as population size, number of households, or income levels. For example, you might receive a territory with 250,000 residents, 50,000 single-family homeowners, or 100,000 households earning over $100,000 annually. Ideally, territories reflect the franchise’s actual customer base, but many simply use population figures. Therefore, it's crucial to independently research and confirm the customer demographics yourself.

Evaluating Territory Viability

A franchise might assign a territory based on a general population without considering if these people fit their specific customer profile. For instance, a franchise that sells to businesses may award a territory with 250,000 residents, however that territory might only have 80 suitable businesses for your franchise. Without further research, you might mistakenly buy a non-viable territory.

To avoid this:

1. Clearly identify your franchise’s actual customer type.

2. Verify that your territory has sufficient potential customers.

3. Find detailed data (public or purchased) on your target demographic. For example, a residential painting business might require data on home age and ownership duration—information franchisors typically don't provide.

Estimating Your Market Potential

Ask yourself, "How big can I grow in this territory?"

• Determine the number of potential customers.

• Calculate average ticket prices and purchase frequency per year.

• Estimate a realistic market share you could achieve.

A quick way to gauge potential growth is by reviewing average revenue for franchisees in similar markets. This helps you determine whether deeper research is justified. If franchisees generally struggle, skip detailed analysis. But if franchisees consistently hit desirable revenue targets, dive deeper.

Brick-and-Mortar vs. Mobile Businesses

• Brick-and-Mortar: Consider customer drive-time statistics for your industry. This helps predict how much business you can realistically attract.

• Mobile Businesses: Start with desired income and reverse-engineer your territory needs. If you aim for $500k annually, and one territory yields $100k, you'll need five territories. Mobile businesses scale more easily since additional territories often only require additional franchise fees rather than substantial new infrastructure.

  • For example, a second territory projecting $45k annually may initially seem unattractive compared to your $150k primary territory. However, if servicing this area requires no new infrastructure and only costs the franchise fee ($45k), it becomes an appealing, quick ROI investment.

Identifying Key KPIs

As you narrow franchise choices, ask franchisors about critical KPIs indicating market viability. Common examples include average household income, number of private schools, or number of businesses. Multiply these indicators by potential customer numbers and your product/service price to estimate market size.

Also, evaluate competitors relative to market size. It's usually better to compete in a $1 billion market with 100 competitors than a $10 million market with just 10 competitors. Later, mystery shop these competitors to gauge their service quality.

Where to Find Data

Reliable market data can be free or paid:

• Government reports

• Trade publications and industry websites

• Competitor websites (which might offer industry analyses)

Franchisors typically provide basic demographics, but thorough, detailed data can significantly impact profitability.

Investing in Professional Research

If unsure about territory viability, consider paying for a professional feasibility study (around $5,000) or use a deep-research AI tool. A feasibility study is a wise investment if it prevents you from committing hundreds of thousands of dollars to a poor-performing territory.

Bottom line: Deep territory research is critical. Knowing exactly who your customers are and confirming there are enough of them in your territory is the key to franchise success.