What is the difference between Franchising, Distribution, Agency and Licensing?
Article by Nick Williams
Ashtons Franchise Consulting
Many people fail to understand what the distinctive differences between the different types of agreements - Franchising, Distribution, Agency and Licensing – made with a third party to represent a business or brand in a certain way are. It is for this reason that I have tried to explain each agreement in more detail below.
Each relationship is governed by a legal document – a contract – but it is the detail that is contained in the agreement and the level of control that the donor company (the company that wishes to expand) choses to exercise that will ultimately define the relationship.
In our view, full Business Format Franchising does exactly what it says on the tin! The franchisee is provided with a business in box, in exchange for a financial payment, not only in terms of a working and successful and proven model, but also in terms of assistance to set up and ongoing support throughout the lifetime of their relationship.
The Franchisor is required to maintain the brand and keep the business offer current. Depending on the level of control they wish to exercise the franchisor can take a very, very tight approach which may be counterproductive to recruiting franchisees and so we always recommend that care be exercised in having just the right amount of control to protect the brand, and fellow franchisees, but not so much as to discourage good quality candidates joining the business. The following notes may help
There is no legal definition of franchising but a franchise is a contractual relationship where the franchisor:
• allows a franchisee to use its trade name, marks and brands
• exercises continuing control over a franchisee
• is obliged to provide training and assistance to a franchisee
• requires a franchisee to make an initial and continuing payments to the franchisor
A manufacturer or a supplier of goods appoints an independent third party – the distributor – to market its goods. The independent third party purchases the goods on his own account and trades under his own name as an authorised distributor.
His business name will usually have no connection with the name of the supplier of the goods nor will the supplier regulate the way in which the distributor operates his business other than, perhaps, to oblige the distributor to reach minimum turnover levels, to maintain advertising and PR material, to maintain minimum stocks both of goods and spare parts and to employ experienced servicing representatives.
The obligations on a distributor should not be compared to the much more extensive restrictions which a franchisor seeks to impose on its franchisees. Furthermore, no management service fees are payable to the supplier by the distributor. The supplier’s profit arises from the difference between the price at which he manufactures or which he pays for the goods and the price at which he is able to sell the goods to the distributor. The distributor’s profit is in the difference between his buying and selling price.
Whilst a clear distinction can be drawn between franchising and distribution it should not be forgotten that franchising has evolved through the development of distributorship agreements.
Agents do not purchase products in their own name, and receive a commission on paid for sales which is normally a percentage of the selling price.
All contracts are made either directly by the supplier and the ultimate customer or by the agent on behalf of the supplier. A supplier imposes relatively few restrictions on his agents and these normally relate to:
• what the agent can say about the supplier’s products
• the price at which the products are sold
• the terms and conditions of sale
Some franchises do, however, contain an agency-principal relationship. This frequently occurs in parcels delivery franchises where contracts with customers are generally entered into by the franchisor but delivery and collection is effected through franchisees.
Intellectual property rights or know how are frequently licensed to another manufacturer to enable that manufacturer to manufacture and/or sell goods.
Whilst most franchise agreements contain a license to use the franchisor’s trade mark, brand names and know how, franchise agreements are unlikely to relate to the manufacture of products, and a franchisor will seek to regulate the way in which the franchisee operates his business (as opposed to quality control restrictions in relation to the goods to be manufactured in accordance with the license) in much more detail than a simple license agreement.
Mostly distribution and agency relate to a sales channel – whereas licensing relates to a sales channel but also potentially a manufacturing relationship. Franchising and manufacturing by contrast, are much less likely bedmates.
Last Updated: 17-January-2020