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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.
This handbook covers all the essential topics you need to know about franchising your business.
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.
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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.
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, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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