What is the Difference Between Franchise Agreements and Distributorships?

Summary

• Franchise agreements grant franchisees the right to operate a business using the franchisor’s trade marks, proven business model, and operating systems in exchange for initial fees and ongoing royalties, whilst distributorships involve suppliers appointing intermediaries to sell their products without the same level of operational control or ongoing fee obligations.
• Franchisors retain significantly more control over franchisees than suppliers do over distributors, with franchise agreements detailing operating standards, intellectual property usage, training, and support provisions, whilst distribution agreements focus primarily on product supply, exclusivity terms, and termination rights.
• Business owners choosing between the two models should consider their appetite for control and responsibility: franchising offers greater brand protection and network consistency but requires ongoing involvement, whilst distributorships offer less administrative burden but provide less control over how the brand is represented in the market.
• This article is a guide to franchise agreements and distributorships for business owners in Australia, explaining the key differences between the two models and the considerations involved in choosing the right approach for expanding a brand.
• LegalVision is a commercial law firm that specialises in advising clients on franchise law and commercial contracts.

Tips for Businesses

Carefully assess your business goals and capacity for ongoing involvement before choosing between franchising and distribution, as the two models carry very different levels of control, responsibility, and financial obligation. Ensure all key terms including exclusivity, termination rights, and intellectual property usage are clearly documented in whichever agreement you use, as ambiguity in these areas is a common source of disputes. Seek legal advice before entering into either a franchise agreement or a distributorship to ensure the arrangement is structured appropriately for your business model and complies with applicable laws.

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On this page

• What Are Franchise Agreements?
• What Are Distributorships?
• Key Differences Between Franchises and Distributorships 
• What Happens When a Franchise Agreement or Distributorship Ends?
• Key Takeaways
• Frequently Asked Questions

Business owners can sell their brand’s products through many different methods. Two of these methods are franchise agreements and distributorships. In franchising, a franchisor gives a franchisee the right to run a business that uses the same operating systems and branding as the franchised brand. On the other hand, distributorships involve suppliers agreeing that another party can sell their products. This article will explain the differences between franchise agreements and distributorships and highlight the importance of seeking legal advice when entering such arrangements. 

What Are Franchise Agreements?

Franchise agreements involve a business owner allowing other parties (franchisees) to run business units that use the franchised brand’s: 

• trade marks; 
• proven business model; and 
• operating systems. 

Franchisees usually also exclusively sell the franchised brand’s products and services. Franchisees buy their rights to operate and pay royalties and fees to the franchisor for the agreement’s duration. 

What Are Distributorships?

In a distributorship, a supplier relies on distributors to sell their products to customers. A distributorship means that the supplier does not sell their products directly to the end-users but rather through intermediaries (the suppliers) responsible for distributing the products to consumers.

Like franchise agreements, a distributor agreement will detail the roles and responsibilities of the distributor and supplier. Both contracts will also cover aspects such as:

• exclusivity terms; 
• the rights of both parties; and
• termination clauses. 

However, franchising entails a different business relationship. Franchisors have more control over the franchisee’s operations than suppliers would over their distributors. Franchise agreements will include aspects such as:

• the franchisee’s rights to use the franchisor’s intellectual property; 
• operating standards and the franchisor’s expectations; and
• training and support provisions. 

Key Differences Between Franchises and Distributorships 

Below we explain two key differences between franchise and distributor agreements. 

1. Level of Control

A similarity between franchising and distributorships is that franchisees and suppliers run their own businesses. These businesses are separate entities from those of the franchisor or supplier. However, one key difference between franchising and distributorships is the level of control franchisors and suppliers have. 

In distributorships, the supplier will provide the distributor with products, but they will have limited control over how the supplier operates their business. In franchising, the franchise agreement carefully details how a franchisee should run their unit. Franchisors will often work closely with their franchisees by:

• providing support; 
• conducting site visits; and 
• maintaining the overarching franchise network. 

Suppliers’ relationships with their distributors differ from those franchisors share with franchisees. One advantage of franchising is the degree of control franchisors retain over their brand and its public perception. Alternatively, some business owners may prefer the lesser degree of responsibility that comes with distribution agreements. 

2. Proven Business Model 

In franchising, the franchisee purchases the rights to use the franchisor’s business model. A franchisor trains its franchisees, who then use the franchised brand’s processes and operating systems. 

The business comes in a ready-made package that has been tried and tested by the franchisor and their existing franchisees. A franchisee can access the franchisor’s knowledge and ongoing support in exchange for their initial investment and ongoing fees.

In contrast, distributorships do not come with the same package, nor do the distributors pay ongoing service fees. 

What Happens When a Franchise Agreement or Distributorship Ends?

Understanding what happens at the end of the arrangement is just as important as understanding how it begins.

For franchise agreements, the termination provisions will typically cover:

• whether the franchisee can renew the agreement and on what terms;
• post-termination restrictions, such as non-compete clauses preventing the franchisee from operating a competing business; and
• what happens to the franchisee’s use of the franchisor’s trade marks and intellectual property once the agreement ends.

Post-termination restrictions are common in franchise agreements and can significantly limit what a former franchisee can do next. These clauses must be reasonable in scope and duration to be enforceable.

For distributorships, termination is generally more straightforward. However, distributors should check whether the agreement includes:

• a minimum notice period before termination; and
• any compensation provisions if the supplier terminates without cause.

In the UK, there is no equivalent of the EU’s commercial agents’ compensation regime for distributors. This means distributors have limited statutory protection on termination, making clear contractual terms essential. Both parties should review exit provisions carefully before signing any agreement.

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Key Takeaways

Both franchise agreements and distributorships can allow you to expand your brand’s reach and access new markets. However, there are several key differences between the two methods. The differences discussed in this article include:

• the type of relationship franchisors and suppliers share with those selling their products; and
• the level of control the initial business owner retains over their brand.

In addition, franchisors provide training and support, whereas suppliers do not. Similarly, franchisees get a business in a ready-made package, whereas distributors do not. If you are considering either approach, you must understand its implications and whether it suits your business. This way, you can make an informed decision. 

If you need help setting up a franchise, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced franchise lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.

Frequently Asked Questions