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.
Difference between Franchise and Distributorship The differences in both may be enunciated on the following basis
A franchise has different responsibilities and functions than a distributor.
Franchisees enter into a legal contract with the parent company to serve as a licensed operator under the parent company’s name and the company must provide adequate training to allow the franchisee to do so.
A distribution agreement between the parent company and a distributor or seller permits the distributor to market and sell the parent company’s products but under the distributor’s name.
The franchisor, or parent company, lets the franchise use any trademarks or brand names needed to run the franchise. These trademarks bring the recognition of the parent company to the franchisee. McDonald’s is an example of a franchise with brand name recognition.
A distribution agreement does not allow the distributor to claim any trademarks or brands. Instead, the distributor uses its own business name to sell the parent company’s products.
A franchise must follow the guidelines and standards of the parent company. Franchises also must pay fees to the parent company for use of the company’s name and products. The parent company has an obligation to ensure that the franchise has all the resources including training and technical advice needed for success.
A distribution agreement obligates the distributor to effectively sell the company’s products by keeping enough products in stock, minimizing employee turnover and advertising the products
4.Extent of Control:
A much greater degree of control is exercised by the franchisor over the franchisee in comparison with a supplier over his distributor. Most, if not all, aspects of a franchisee’s business is controlled by the franchisor, which may include:
i) Operational and Procedural guidelines which the franchisee must adhere to.
ii) Hire and train suitable staff, to the extent dictated by the franchisor.
iii) Advertise and promote the franchise as per the guidelines of the franchisor.
The above conditions are laid down generally to ensure consistency and quality within the franchise.
However, such control, in the absence of a contract to the contrary, is not exercised over a distributor, who conducts the business with regards to its operations according to his free will.
5.Payment of Royalty
A franchisee is required by the franchise agreement to pay a continuing fee to the franchisor known as ‘royalty.’
Whereas, no such fee is required to be paid by the distributor to the supplier.
As the franchisor exercises greater control over the franchisee, the extent of his liability is greater than that of supplier.
A distribution sells goods on his own behalf and is liable for his acts or omissions.
However, the extent of liability, again, depends on the circumstances of each individual case.
In Franchise as well as in a Distributor’s Agreement the manufacturer’s copyright is maintained, with the only variant being the extent of the liabilities incurred through its use.
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