What is a franchise, distributorship or agency arrangement?
As you can’t have your own people all around the globe, you will need another avenue to be represented. Working with agents, distributors or franchisees will give you a broader exposure in the market and ensures distribution of the products and services you want to offer to your customers.
Difference between distributor and agent
Agents will sell your goods without taking ownership, distributors will buy your goods and resell them. Agents and distributors are both companies that will represent your brand in foreign markets, but are still working under their own name. It is important to know the differences between these two, as this can have various legal implications.
Ownership of goods
Agents do not take ownership of goods. An agent represents the supplier as a manufacturer or service provider in the foreign market.
Distributors purchase goods and resells them to consumers. They also provide support and after-sales services.
Agents are paid by supplier through commission on sales. The supplier sets the selling price. The commission on the sales should be enough to make it interesting for the agent to sell your goods or services.
Distributors add margins on top of prices, which can be higher than an agent’s fees. Subsequently, the price becomes higher for consumers. The manufacturer eventually may not even know the sales prices, he may only know the price the distributor paid him. It is important to set the transfer price such, that the distributor can make a reasonable margin.
Agents orders go through suppliers but the agents will deliver, invoice, and collect payments from customers. Agents will focus on sales and sales development.
Distributors take care of inventory, they extend credit to customers and provide more services than agents thus their fees are mostly higher than an agent’s is.
Product sales and risk of cannibalization
Agents have smaller product ranges than distributors. An agent provides more focus on products.
Distributors sell multiple products. Their focus is more divided.
Franchisor, franchisee and licensing
For your business to thrive, not only is it very essential for you to find the right business partners, you also need to find the perfect sales models for you and your business venture.
A license is a formal permission or authority to do something that otherwise would be forbidden, for example using a brand, patent-protected technology, software or a database.
A franchise is a contract between a brand owner (the franchisor) and another party (the franchisee) to use a brand, but also to obtain products, services and support from the franchisor. While using the brand the franchisee is often obliged use the shop furnishing, signs and corporate style and to pay a part of his turnover or profit to the franchisor. So this is substantially more than a distributorship.
There are three different kinds of franchise:
- Product Franchise – an outlet for a particular product
Examples: Coca-Cola, Exxon, the Ford Motor Company, and Osim
- System Franchise – authorized to conduct a business according to a system developed by the franchisor.
Examples: American Idol, Hilton, and UPS Store
- Process or Manufacture Franchise – franchisor supplies a critical ingredient or know-how for a production process.
Examples: Dunkin’ Donuts, Famous Amos, KFC, McDonalds, and Starbucks Coffee
Implications on sales partners
Once you get your sales partner active, it does not mean you let them do all the work. The whole process would still involve ongoing communication and support.
With sales agent, stay in regular contact. Get them excited about your products. Help them to be a competitive player in the market.
With distributors, be aware of how products fit with ranging policies. Train their sales team. Help in promoting the products and stay on top of seasonal and dated stock.
With Licensees, make sure legal documentation is sound. Make a good effort to understand the licensee's business.
With Franchisees, use a franchise consultant to help develop the package. Spend enough time on training and on understanding your brand values
It is very essential that one knows the partners they engage in business with and how their products go through the distribution process and through sales. Knowing the basics and terminologies in conducting business is key.
Franchise agency or franchising agent: a special case
Normally franchisees act as distributors: they mostly purchase goods from the franchisor, own them, and sell them to their customers. Agents, on the contrary work under their own name and do not take ownership. A franchise agency uses the brand of the franchisor and sells the products or services of the franchisor under that brand.
Franchising agents can be used for to sell products or services, without having to employ sales staff. The agents are paid a commission on the sales they make, and can also provide part of the services that they sell along.
Suggestions for further reading
- International distribution strategy: managing your foreign distribution channels
- Typical costs for international transport and global distribution
- What is a reasonable margin for your distributor?
- Your international sales agent: what margin or percentage to pay as fee?
- Selling in China: how to do international business with the Chinese?
- How to find your agent or distributor for export to Japan?
- How to find your agent or distributor in India?