Hamilton Pratt

What is the difference between Franchising, Distribution, Licensing and Agency?

Franchising   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

Distribution   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 be compared to the much more extensive restrictions which a franchisor seeks to impose on its franchisees.  Furthermore, no royalties 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.

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.

Agency   Agents do not purchase products in their own name.  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.

Licensing   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 licence 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 licence) in much more detail than a simple licence agreement.