If you are looking to expand your business, there are several models to consider. The key ways to get your goods to market include agency, distribution, and franchising arrangements.
But what do these models involve – and what are their advantages and disadvantages? How do you decide which is best for you? Which models provide more control for a supplier?
Distribution and agency are similar, but their legal structure is different. Franchising has some features in common with distribution models.
We consider the key characteristics of the three models below.
Agency
An agent is an intermediary between the supplier (typically
overseas) and its customers.
Use of an agent allows the supplier to retain control over its
sales strategy and markets, including pricing.
Agents come in two main types: marketing agents and commercial agents. Marketing agents only have authority to refer customers and leads to the overseas supplier. They don't enter into contracts on behalf of the supplier.
Commercial agents typically do have authority to negotiate and enter into contracts on behalf of a supplier. The UK Commercial Agents Regulations, derived from European law, enhance the position and security of qualifying commercial agents operating in the UK, particularly in relation to remuneration, notice periods and termination payments. (Subject to exceptions, the Regulations generally apply to agents involved in the sale of goods (not services) where the agent has continuing authority to negotiate the sale or purchase of goods on behalf of their principal). Many provisions of the Commercial Agents Regulations are implied into an agency agreement and the parties to the agency agreement may not contract out of them. Because of this, specialist advice should be sought before appointing (or terminating) any agent. The outgoing UK Government has been consulting on changing the Regulations but any change depends on the government in power after the General Election on 4 July.
Appointing a distributor
A distributor will typically purchase goods from a supplier (usually overseas – for example, UK distributors for overseas companies or vice versa) and then contract in its own name and on its own behalf with customers to sell the goods. The use of a distributor can allow a supplier to reduce the risk and cost of selling in new geographical markets but the flip side is that the supplier will usually makes less margin overall and will typically have less control of markets where it appoints distributors.
Distributor relationships in the UK are regulated by the general principles of UK contract law. Distribution agreements that deal with a significant share of the market in a particular sector or confer territorial exclusivity on the distributor can raise complex competition (anti-trust) issues if they are or may be deemed by UK (and where relevant EU) legislation to be anti-competitive. If you wish to use or join a selective distribution system (e.g. where you want only your products to be sold by "high end" retailers) you may also need to consider competition law issues. Specialist advice will be needed when considering these arrangements.
Appointing a franchisee
Using franchisees in the UK marketplace (or overseas) enables a franchisor to benefit from the franchisee's local market knowledge, resources and contacts. It also allows franchisors to develop and maximise their brand value using the franchisee's resources whilst retaining a significant degree of control. Franchise agreements can increase the profile of a franchisor's business in various places, as well as generating revenue. It allows for cost effective expansion into overseas markets. That said, they can often necessitate significant up-front investment for items such as franchisee operating manuals, market research, financial projections, and governance, as well as the infrastructure for the franchise operations to operate efficiently. This might involve issues such as property and/or equipment leases, accounting, taxes and stock management. There is little specific regulation of franchising in the UK although UK and where relevant EU competition laws can apply. Non-competes and/ other restrictive covenants also need careful thought. Franchising is a complex area and needs careful structuring.
How do I decide?
Much will depend on the level of control you prefer, your appetite for risk, the financial firepower available to you, and the nature of your goods or services. We can help with tailored advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.