Distributors, agents and franchising

Marketing and selling directly to customers is not always the most effective way of growing a business. Building relationships with customers can take a long time and lack of capital can slow your growth.

Many businesses sell to distributors, or work with agents who market on their behalf. Another alternative may be to set up a joint venture (JV) or to franchise your business, allowing other businesses to operate under your brand name. Whichever route you choose, you need to understand what is involved and make sure you have a clear agreement covering how the arrangement will work.

Distributors and agents

Distributors buy your products from you, and then sell them on at a profit. Distributors such as wholesalers and retailers are often used as a route to market for lower-value, relatively straightforward products.

The distribution agreement should cover all the key elements of your relationship. These will include the distributor’s territory and whether they have exclusivity, whether they can sell competing products, and practical issues such as delivery and payment arrangements.

Sales agents negotiate sales on your behalf, usually for a commission. Agents are often preferable if your products are high-value, complex or bespoke. Key issues in the agency agreement will include what authority the agent has to act on your behalf and what rate of commission will be paid to the agent.

Joint ventures and franchises

You may decide to joint venture with another business (usually by setting up a jointly-owned joint venture company), pooling resources to undertake an activity that benefits you both, and sharing costs and risks. Joint ventures may be set up for one project or for ongoing collaboration.

Franchising provides an alternative if your business provides a model that can be replicated. Rather than setting up new outlets yourself, you - the franchisor - franchise out the business to independent franchisees who pay you franchise fees. In return, you offer training, support and the right to use your brand.

Key legal issues

Distributorships, agency agreements and other types of arrangement involve complex legal and commercial issues. For example, you need to consider what rights each party has to use intellectual property (such as any trade marks) and the implications this could have.

One key area is to agree how the relationship will come to an end, and to make sure you are properly protected: for example, how to prevent a former joint venture partner from going into competition with you. Termination arrangements for self-employed agents may need special attention to avoid unexpected liabilities.

Complex rules on price competition also need to be taken into account. For example, requiring your distributors to charge a set price is likely to constitute illegal price fixing.

Legal advice will help you draw up an agreement that clearly sets out each side’s rights and responsibilities and avoids any of the legal pitfalls.