As you expand your businesses there comes a point where you have to consider allowing
someone else access to your ideas or part of your business to enable controlled expansion. There are
3 common ways for someone to consider this option – Distribution, Franchising, Licensing.
This situation usually occurs where you manufacture, make or supply goods. The distributor buys
those goods from you as a discounted rate and resale, to sell it on to others. The goods can be
anything at all from handbags to software. A distributor will enter into an agreement with you to
supply the goods and enabling them to buy from you at favorable (lower than you would normally
sell) prices. However, the distributor will always remain an independent business to your
organization so you effectively don’t have control over their business. Of course, in the agreement
you will have some say about certain aspects connected with selling and promoting your goods. For
example, you will place limits on the advertising (to ensure that your product is not misrepresented).
So, because the distributor can buy from you at a lower rate than you would usually charge, you will
ask them to purchase minimum levels of products from you in a given period. Agreements usually
linked to specific geographical areas (referred to as territories) and can be exclusive. It means that
only one distributor can sell your products in a particular territory. That’s why you must consider this
carefully because limitations in this way may limit your expansion. Needless to say, you have to
include some incentive schemes (to promote sales levels), liability levels, confidentiality, shipping,
insurance when the title (ownership) of the goods will pass.
To some extent franchising takes the ideas behind distribution further. With franchising the
franchiser (organization allowing their business to be franchised) allows the franchisee to actually
use their business idea, its name and brand, trademarks etc and so has control over the franchisee.
Franchisees usually see the main advantage in getting in a franchise is that they are starting up a
business with an already proven track record. Typically, statistics show that franchises have a lower
failure level than other start up businesses. However, conversely the restrictions may place a sealing
on the Franchisees earnings level. Again both parties will enter into an agreement and usually there
is an initial payment for purchasing the franchise (i.e. the right to use the brand name etc).
Nevertheless, because the franchisee has continuing support from the franchiser there will be a
continuing payment (usually based on a percentage of revenue) from the franchisee to the
franchiser. In addition, there are more extensive obligations from the franchiser who will usually
providing training, premises or assistance with locating them, assistance with set up and then with
improving the business. It includes certain business support such as aspects of management and
accounting. In return, in order to protect their brand, the franchiser will have greater control over the
franchisee’s business and will monitor the franchisee’s performance. Like Distribution Agreements,
Franchise Agreements will cover specified territories and can be exclusive. It includes exit strategy,
restrictions, and clearly define the level if support.
This situation occurs where you own rights, including the ownership over ideas, design, inventions,
artistic expressions etc and as protected by copyright, patents, trademarks. So, you are happy to
allow an independent person or organization (the Licensee) to buy that right to make and/or use it,
as appropriate, make, sell, market and goods or services. This means that the owner allows the
licensee the right to use the intellectual property rights, actually still retaining ultimate ownership.
Licensing Agreements will be for a fixed time (the term) and like the other agreements can be
exclusive. In a licensing agreement, the licensor’s control over the manufacture and sale of goods
etc will be much less but there is usually a very limited or no level of support offered to the licensee.
As well as an initial payment for the license, the licensor will pay the licensee a continuing payment,
usually a royalty which will be based on production etc. Other points you should consider in the
agreement will include whether you will allow sub-licensing, taxation on royalties, quality controls,
and as applicable product liability indemnity.
All of these agreements are potentially suitable whether you manufacture or make goods or supply
services. Initially, you need to consider the levels of control that you wish to maintain. All of them
however do depend on how you have properly protected your “business” with the appropriate
trademark or patent. Although at the start of the process you all potential parties to any such
agreement should sign a Non-Disclosure Agreement (NDA) you will still be releasing your very
valuable business “secrets and know-how”. It is vital that whichever option you explore that your
final agreement is written so both parties understand the obligations and boundaries of the