We often see confusion about the differences between distribution and franchise agreements, and the situations in which each should be used. There are key differences between the two types of agreement and the relationship they seek to establish, and careful consideration should be undertaken prior to entering into either.
From the outset, it should be noted that franchising relationships can be far more involved than distributorships, as usually the franchisor exercises a much greater level of control over the franchisee and the franchisee's operation of the franchised business, than a supplier would a distributor.
Most franchise systems generally require a franchisee to open an outlet branded with the franchisor's brand in order to provide the products and/or services contemplated by the agreement.
A franchise often involves:
- a franchisor licensing the franchisor's brand to a franchisee to supply goods or services under such brand;
- a franchisor exercising continual quality control over the franchisee, often by way of an operations manual, marketing plans and inspections and other systems to ensure brand standards across the network are maintained;
- a franchisor providing assistance and training to the franchisee; and
- a franchisee making periodic payments to the franchisor (often royalties) in exchange for the right to use the know-how and the brand.
In many jurisdictions the franchise relationship is regulated by specific laws. In some countries a franchisor is required to provide the franchisee with a detailed disclosure document setting out key information about the franchise business prior to entering into the agreement.
Whereas under a franchise the franchisor provides a lot of know-how and assistance to operate a business selling goods and/or services under the franchisor's brand, a distribution agreement grants a party the right to re-sell a supplier or manufacturer's products in a given territory. Whilst there will be some sort of regulation surrounding the distributor's use of the supplier's brand in the agreement, most generally do not seek to regulate the operation of the distributor's business, or to obligate the distributor to open a physical outlet branded with the supplier's brand.
A distributor will generally pay a supplier a fixed fee to purchase the products contemplated by the agreement from the supplier, and will then re-sell those products in the territory at a mark-up. Title to the products will generally pass to the distributor upon payment to the supplier, and any failure to re-sell those products by the distributor will be the distributor's loss. The distributor usually keeps any profit made from the re-sale (depending on the commercial terms of the deal that has been struck), and is not required to pay any ongoing fees to the supplier for the right to sell the products under the brand.
Commercial Agency Laws
As an additional consideration to the above, the UAE (and most GCC) Commercial Agency Law ("Laws") fails to differentiate between franchise agreements and distribution agreements, and both may be construed as a commercial agency capable of registration, if the relationship between the parties meets the requirements for registration. These Laws tend to favour franchisees, and we therefore strongly recommend that you seek legal advice on this point prior to negotiating either a franchise or distribution agreement with a prospective partner in this region.