As a manufacturer or supplier, a business may choose to sell their product by means of an agent, distributor or franchise. All three effectively serve as a middleman between supplier and final customer, but their relationships to the supplier are each unique. There is often confusion around the difference between agency, distribution and franchise agreements.

This article seeks to explain the nature of each, how they differ, and why you may prefer one relationship (and therefore agreement) over another.

Agency Agreements

With an Agency Agreement, a business appoints a third party to sell their products on their behalf. At no point does the agent purchase the products themselves. Instead they market the product in exchange for commission – generally a percentage of the final sale value. The commission is typically paid to the agent once the purchase has been made or the contract signed.

Since the agent’s role is to work on the supplier’s behalf, any sales contract exists between supplier and final customer alone. The agent is paid directly by the supplier and therefore assumes no liability from the sale. They do, however, represent the supplier’s brand and company values so their actions reflect directly on the supplier.

Advantages of an agency agreement:

• Maintaining an element of control over the end contract.
• Benefiting from the agent’s established trade connections within a local area or new market.
• Saving the time and expense of managing marketing and sales operations internally.
• Ability to fix resale prices without breaching UK and EU competition law.

Disadvantages of an agency agreement:

• A degree of ongoing supervision will be required, which may be challenging where the agent is overseas.
• The agent’s actions are directly attributed to the supplier since they are acting on their behalf.
• The supplier retains all contractual liability for the product or any contract the agent has entered into on their behalf.

Distribution Agreements

Rather than entering into contracts with end users directly, many suppliers use distributors to sell their products. The distributor purchases the product from the supplier at a wholesale rate and then markets and sells the product using their own trade name.

Although the two parties work closely together, the distributor is a separate entity which operates in its own right. Therefore the supplier has less control over the distributor’s activities, aside from any terms set out in the distribution agreement. The distributor has autonomy over their own profit margins and is not required to pay any service fees, unlike a franchisee. Likewise, the supplier is not liable for the distributor’s actions, and the distributor takes on a level of risk and liability associated with the stock.

A Distribution Agreement will set out the rights and responsibilities for both supplier and distributor. This will cover terms such as competition and exclusivity terms, as well as conditions for termination of the contract or dispute resolution. The distributor may be required to reach a minimum order level, as well as maintaining minimum stock levels of goods and spare parts.

Advantages of Distribution:

• Use of distributor’s local knowledge.
• Sale in bulk orders rather than individual sales to the end user.
• The distributor takes on the risk associated with holding stock and liability towards the end user.
• No liability for the distributor’s acts, as they trade under a separate name.

Disadvantages of Distribution:

• Competition and exclusivity terms may restrict the supplier’s ability to separately market their own product in certain territories.
• Loss of control over how products are marketed.

Franchise Agreements

In a franchise agreement, a franchisee purchases the right to use the franchisor’s brand and expertise in order to sell the goods and services. The franchisee makes regular payments to the franchisor in return for access to their branding and knowledge. This is not to be confused with a license agreement, whereby a supplier licences out the intellectual property rights to their product, allowing the licensee to make use of the product for commercial gain.

The relationship between the two parties is far closer than that of a supplier and distributor, since the franchisor has a higher level of control over the activities of the franchised business. The franchisee is typically required to open a premises using the franchisor’s branding, and the franchisor may carry out inspections and impose requirements to ensure their brand is being adequately represented. Equally, the franchisor has a responsibility to provide training and support to the franchisee, as well as maintaining the brand value to ensure it continues to benefit the franchisee.

Advantages of Franchises

• The Franchisee gains a ready-made business model.
• The franchisee benefits from the franchisor’s brand, knowledge and resources.
• Franchisor is guaranteed regular ongoing payments from franchisee.

Disadvantages of Franchises

• The supplier has a responsibility to maintain the brand value and provide ongoing support.
• Regular inspections and supervisions may be required to ensure the quality of the brand is maintained by the franchisee.

Before entering into an agreement

Understanding the difference between agency, distribution and franchise agreements is essential to building a successful sales strategy, particularly if you are trying to break into new markets. Each relationship has distinct advantages over the others but the level of supervision and duty of care required varies widely.

It is highly advisable to seek legal advice before entering into any of these agreements and our legal experts are always happy to assist. You can get in touch with us here to give us details of your enquiry.