A business owner can enter the market as a seller by manufacturing their own products directly. For most business owners, however, especially for startups, a franchise agreement or a distribution agreement would be most suitable. Both types of agreements permit sellers to resell items created by another company in a more effective and affordable means.
1. What is a “franchise”?
A franchise is a method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty (and often an initial fee) for the right to do business under the franchisor’s name and system.
A franchise agreement is a legally binding contract between the franchisor and franchisee that sets forth the rights, responsibilities, obligations and compensation of both parties in relation to the operation of the franchise. The franchisee purchases the right to market and sell the items under the trademarked name of the franchisor.
2. What is a “distribution”?
A distribution agreement is a legally binding contract between the supplier and the distributor whereby a distributor buys and sells products from a supplier to sell them to retailers and/or directly to consumers. Thus, the distributor does not have any ownership in the company itself.
The distribution agreement specifies the rights, costs, territory, and responsibilities of the parties in relation to the distribution of the products.
3. Three Main Differences
1. Mode of operation
The franchisee is permitted and encouraged to use the trademarks and brand name of the franchisor as part of its everyday business practices. Instead, the distributor operates under its own business name. It functions as a reseller of the products and does not conduct business on behalf of the company that makes those products.
2. Level of control
The franchisor exercises a much greater level of control over the franchisee and the franchisee’s operation of the franchised business than a supplier would exercise over the distributor’s operations.
A good example would be a franchisor exercising continual quality control over the franchisee, often by way of an operations manual, marketing plans and inspections and other systems to ensure brand standards across the network are maintained.
3. Payment
Generally, a franchisee pays an initial fee and ongoing royalty to the franchisor in order to operate the business under the franchisor’s trademark, while a distributor pays for the products bought from the supplier.