Any business which markets products should consider the different models open to it to expand the reach of its products and grow into new territories.

Agency, distribution and franchise models are popular models for the outsourcing of the selling function of a business and offer several benefits to suppliers, including:

  • taking advantage of the local knowledge and established trade connections of the person who is being appointed; and
  • saving the cost of having to establish its own selling operation or sales force.

In this blog, we will take a broad look at the differences between distribution, agency and franchise models and we will follow this up with a series of future blogs looking at each model in more detail.

Distributor or Commercial Agent?

Distributors and agents are commonly confused with each other, however there are some crucial differences:

  • A distributor is essentially a “re-seller” of products who purchases products from the supplier and then sells the products to its customers, adding a margin to cover its own costs and profit.
  • A commercial agent is more of a “lead generator”, which is appointed by the supplier to source customers for the products. The supplier will enter into the sale contract and the agent will typically be paid a fee/commission on its value.

The distribution model allows a supplier to offload the risk and its stock, however a distributor will typically expect a larger mark-up.

An agency arrangement typically has a lower commission payable and offers the benefit of the supplier retaining control over the terms of sale. However, suppliers should be wary that the Commercial Agents Regulations 1993 (which offer significant protection to agents, including a right to receive compensation upon termination of the arrangement) may apply.

Franchising

Franchising is essentially the granting of a licence by a supplier (or a “franchisor”) for a franchisee to trade under the franchisor’s brand.  Typically, it includes:

  • the franchisor allowing the franchisee to use its name and branding;
  • the franchisor exercising quality control and giving training to the franchisee;
  • the franchisee making periodical payments to the franchisor.

The franchising model offers the opportunity to the franchisor to use the franchisee’s start-up capital to facilitate the expansion of its network. The main disadvantage to the franchising model is loss of control, however it is usual for franchise agreements to have significant restrictions.

Which model is right for your business?

There are various pros and cons of each approach which we will explore in more detail in the forthcoming series of blogs. Choosing the right model will depend on a number of factors, including the type of product, your profit margin and the local requirements in a specific territory. For more information contact one of our specialist Corporate lawyers here.

Contact Us