There is often a fine line between two terms in the legal world. One such example is the difference between a franchise agreement and distribution agreement. Depending on your situation, you will probably prefer one of these options over the other. Either way, before entering into any contract of any sort, you should understand exactly what it entails. Read this article to find out the differences between these two types of agreements.
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Franchise agreement
A franchise agreement basically dictates what you can or can’t do when franchising an existing business. Typically this is a signed written document, but it can actually be oral or just implied. In general, a franchise agreement would grant the franchisor more control over the relationship than a distributor.
This type of agreement entails a franchisor licensing to a franchisee the right to sell their products. The franchisor also has to maintain the brand. To do so, they are required to provide manuals, assistance and plans to the franchisee. It’s not the franchisee’s responsibility to make sure the business succeeds, only that they have provided as much knowledge as possible.
The franchisee will have to make regularly payments back to the franchisor for the use of said resources and brand name.
Distribution agreement
A distribution agreement works in a similar way to the franchise agreement. The supplier grants the distributor the right to distribute their goods and/or services. There is considerably less involvement from the supplier though, compared to a franchisee.
The distributor simply purchases the goods direct from the supplier at a certain agreed rate, and then re-sells to consumers at a mark-up. The mark-up forms the distributors profit margin. Unlike the franchise agreement where the franchisee has to pay to use the brand name and resources, the distributor just pays for the goods itself.
The supplier has no investment into the distributor, and has no input in how they run it. There is also no exchange of industry knowledge, and assistance of running the business. Whether the business succeeds or fails, it is entirely up to the distributor.
Main differences
There are two main differences between how a franchise agreement and distributor agreement operates.
1. Freedom
As we saw, when you enter into a franchise agreement you are subject to certain rules on how you can operate. These rules come from the franchisor, the owner of the entire brand and company. This is because of the knowledge, resources and reputation that is lended to the franchisee. It is only far that the original owner dictates how they are used.
A supplier in a distribution agreement on the other hand, has no interest in this at all. Their sole purpose is to supply the goods to the distributor at a fixed price. From there, it is entirely up to the distributor how they sell.
This can be both good and bad. For an experienced business person, it is worthwhile to go with a distributors agreements because you can use your own knowledge and have the most freedom. For business beginners, a franchise is often a good start. You have all the assistance you need to get started and to make sure you are successful. After that, it all depends on your drive and motivation.
2. Price
How much you end up paying is another big difference. As a distributor, you just need to start your own company first. The costs associated with that, plus any ASIC payments and the cost for the goods are you main outlays.
For a franchise, you have to purchase the franchise rights from the franchisor. So there are no start up costs like a distributor. On the other hand, you will pay ongoing royalties to the franchisor for the use of their resources. So all the assistance and help you receive basically comes at a cost.
Conclusion
To summarise, both franchise agreements and distributor agreements can be very useful or a hinderance to your business. It depends on what stage you are at in the business game, how much experience you have and your resources. A business lawyer can definitely help you narrow down the option for you specifically, or recommend a different avenue to take if these do not suit you.
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