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Are you considering franchising your business model? Before you do so, you should understand that there are several different approaches to franchising. These approaches include product distribution, management, and business format franchising. The franchise agreement is a fundamental aspect of all these methods. The agreement is a legally binding contract that creates the franchisee-franchisor relationship. The contract’s terms and the style of the franchisee-franchisor relationship can vary depending on the franchising approach a franchise business adopts. These franchises are appropriate for product-focused enterprises. This article will explore product distribution franchising and the types of businesses this model suits.
What is Product Distribution Franchising?
Product distribution franchises involve a franchisor granting a franchisee the right to sell the franchised brand’s products. Depending on the type of business, franchisees may:
- distribute these products to other companies (B2B); or
- sell them directly to customers (B2C).
A distinct quality of these franchises is the supplier-distributor kind of relationship franchisors and franchisees share. However, a franchisor’s level of involvement in the franchisee’s business can vary across different product distribution franchises.
The more popular business format franchise approach involves franchisors providing their franchisees with everything they need to start their businesses. The franchisor will monitor their franchisee’s business operations, ensuring that they remain in line with the approach of the franchised brand. Some product distribution franchises can follow this approach, while others differ, with franchisees enjoying greater freedom over their operations.
The product distribution format often means the franchisee will sell the franchisor’s products exclusively or semi-exclusively. For example, a car dealership operating under a product distribution franchise agreement may sell the franchised brand’s cars exclusively.
What Kind of Businesses is Suited to Product Distribution Franchising?
Franchising can take many different forms. In addition to product distribution and business format franchising, franchises can fall into categories such as ‘manufacturing’ or ‘management franchises’. Each approach prescribes a different franchising model and can alter the style of the franchisor-franchisee relationship.
Not every approach is suitable for every business. The system a franchise adopts can depend on the type of business you run. For example, the kind of enterprise suited to product distribution franchising will differ from those suited to other franchising models. This model suits businesses that sell products and tangible goods. For this reason, it would not be suitable for service-based enterprises.
Businesses suited to product distribution franchising can include those dealing with:
- wholesale distribution;
- automotive parts; and
- retail products.
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Product Distribution Franchises vs. Licensing Agreements
Product distribution franchising creates a supplier-distributor style relationship between the franchisor and the franchisee. This relationship makes this type of franchising similar to licensing agreements, but the two approaches are legally distinct. Licensing agreements and franchise agreements form different contractual relationships.
Further distinguishing factors between franchising and licensing agreements include the following:
- franchise agreements tend to contain more provisions relating to the support, rights, and roles of franchisees than licensing agreements provide for licensees;
- franchisors offer a program of training and ongoing support to their franchisees; and
- licensors sometimes grant licences rights to use their intellectual property, but this is more common in franchisor-franchisee relationships.
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Product distribution franchising involves a distributor-supplier style relationship between the franchisee and the franchisor. The franchisor will provide products, and the franchisee will sell them. This kind of franchising suits businesses where operations are product-focused rather than service-focused.
Additionally, these franchises could involve the franchisor providing a complete business package instructing the franchisee on running their business. Alternatively, a product distribution franchise relationship could adopt a more relaxed format, where the franchisee operates a company entirely independent of the franchised brand but sells the franchisor’s products. In this case, the franchisee would retain control over their business, operating under a separate business name independent from the franchisor’s brand.
If you need help joining a franchise or deciding whether an opportunity is right for you, 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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