Steve Jones – Managing Director, Select Your Franchise UK Ltd
If you’re looking at expanding your business, there are several different options for how to proceed. Today we’ll look at what these are and the advantages and disadvantages for each.
Agency
An agent is a person who acts on behalf of someone (called the principal) – the agent’s word is binding upon the principal, so it is important that an agent be extremely trustworthy. The agent doesn’t usually pay an upfront fee to act as an agent, so they don’t bear a substantial financial risk, and they also don’t produce products in their own name.
An agent makes a commission which is usually based as a percentage of the sales they have made on the behalf of the principal. Agencies can be cheaper and less controlled, but as the principal can be liable for anything that the agent does, there are clear limitations on agency as an option for expanding your business.
Distributorship
A distributor acts on his own behalf, purchasing products directly from the supplier and selling them on to customers, adding a mark up in order to cover costs and also make a profit. The supplier doesn’t get paid any royalties, and as such operates under his or her own name. A distributor may also sell the products of other manufacturers and suppliers. In some cases the supplier may stipulate that the distributor adheres to certain standards in areas such as advertising and minimum stock levels; these controls are not as strict as those imposed in franchising.
As no royalties are paid by the distributor, the supplier makes their money from the difference in price between the manufacturing cost and the cost at which products are sold to the supplier. The supplier has less control over a distributor than a franchisor would have over a franchisee, but the franchisor is also expected to provide significantly more support and training. This ensures that the business is run to the franchisor’s standards, and the good name of the franchisor remains intact.
Licensee
Licensing is where intellectual property rights or know-how are sold to an individual or company allowing the licensee to manufacture or sell certain goods. While this is similar to franchising, a franchisor has much more control over how a franchisee’s business is running, enabling them to maintain stricter oversight over their property.
Franchisee
A franchisee is a self-employed individual who pays a fee in order to use a franchisor’s name, trademarks, product/services and know how. A franchisor sells an established business format, which the franchisee is required to stick to. As part of a franchise agreement, strict controls are placed upon the franchisee, who will receive training and ongoing support from the franchisor.
Out of all the options for expanding a business as set out above, franchising allows the greatest control over the business whilst avoiding the steep overheads of expanding the company yourself. Because the franchisee is self-employed, they have all the incentives required for them to focus on the business to drive it forward whilst the franchisor has all the controls in place to maintain quality and their own reputation, which may be lacking in some of the other options.
Unlike with an agency, because the franchisee pays a fee, they have an immediate financial interest in making the business a success.
