Distribution opportunities, also known as franchises, grant the right to use a method of providing a service, operating or production. Franchisees pay initial and ongoing fees and have access to research and development. Franchises can be in product, business or manufacturing, and are subject to regional and national laws.
A distribution is a commercial agreement that grants the right to use an operating method, a production method or a method of providing a service. These three types of distribution opportunities are also known as franchises. The author of the method is known as the franchisor and the distributor is referred to as the franchisee. Contractual rights include the use of brands and trademarks, manufacturing rights and access to management methods developed specifically for such an operation.
Distribution opportunities can be in a product franchise, a business franchise, or a manufacturing franchise agreement. In all three cases, the franchisee will typically pay the franchisor an initial license fee and ongoing royalty fees. The latter commissions are generally tied directly to the sales generated by the franchise and are usually calculated as a percentage of sales. Specific formulas and rates for calculating franchise fees vary.
A product franchise grants the right to distribute a product using the manufacturer’s brand and trademark. This has the advantage of providing the affiliate with instant recognition of the name in the market. Using brand reputation typically gives a franchisee an edge over a start-up that needs to build its own brand recognition. Owning that name recognition early on is why affiliates generally have an above-average success rate in launching a business.
A manufacturing franchise allows a franchisee to manufacture a product. Typically, the franchisor will require the manufacturer to meet certain specifications and may require the franchisee to use a particular brand of equipment in the manufacturing process. The right to use the franchisor’s brand and trademark is usually included in this agreement. However, this isn’t always the case.
Instead of licensing the right to sell a product or service, a business franchise agreement grants franchisees the right to use a proven business operations formula. Distribution opportunities can be combined. For example, a franchisee may contract with the franchisor to obtain use of the brand name, use of production operating plans, and use of a proven formula for business operations. If this deployment includes plans for the physical layout of the business, it is often referred to as a turnkey operation.
Distribution opportunities are popular, in part because of the benefit of having access to research and development that has already been invested in by the franchisor. Franchising agreements fall within the scope of regional and national laws, in order to ensure the protection of both parties. These laws typically require specific information, especially directed at affiliate protection. Even with the disclosure, regulators recommend thoroughly researching distribution opportunities before signing a contract.
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