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You must establish geographic territories for your franchisees based on the population and demographics of the area. Territories may be designated by zip codes, geographic areas (cities, townships or counties) or be the designation of streets or natural borders.
Territories are critical to the franchisee because they must operate within their boundaries and they may not operate outside the boundaries in a territory belonging to another franchisee. Territory is a large selling point for a franchisee. They want the largest possible exclusive territory and you want to limit the size of the territory in order to sell more of them.
In Item 12 of the Uniform Franchise Offering Circular (UFOC) you are required to define: territory obligations and restrictions, exclusivity and rights, minimum sales requirements and franchisee options. Work with your attorney to make the descriptions as complete as possible without specifying geographic boundaries. These designations may not be standard across the country, and you want as much leeway as you can have in determining fair territories. You may want to specify that a territory must have a minimum number of households with x% of income to support a franchise business. The criteria will be specific to your industry.