Setting up a franchise can be a great business decision.
If you’ve got a business concept that’s working well and you think others can replicate it relatively easily, launching a franchise is a way to grow your business and generate upfront revenue at the same time.
However there are also significant legal and regulatory costs associated with launching a franchise. You’ll probably end up spending anywhere from $50,000 to $80,000 on legal fees before you make a cent in franchise fees. You’ll also have to comply with both the Franchising Code of Conduct and other regulatory requirements. This will cost you significantly as you expand your franchise.
Fortunately there is an alternative; that is the use of a master distribution agreement.
This article explains how:
(a) A master distribution agreement works; and
(b) How it can be used as an alternative to setting up a franchise agreement in the right circumstances.
1. What is a Master Distribution Agreement
A master distribution agreement is really just a distribution agreement that’s been drafted to allow the “manufacturer” (i.e. the equivalent of the franchisor) to work with a number of different distributors (i.e. the equivalent of franchisees) on different terms if required.
2. How can it be used instead of a Franchise Agreement?
When choosing a legal structure it’s important to firstly consider the economics behind the arrangement you’re considering entering into. The reasons a franchisor sets up a franchise are to (i) benefit from an upfront franchise payment and (ii) to benefit from a periodic revenue stream derived from the revenues of the franchisee.
There’s no reason at all why you can’t use a distribution agreement to provide these benefits. The way a traditional distribution agreement works is the distributor pays the manufacturer a margin on any product sold. It’s very easy to tweak a distribution agreement so payment is based on revenue generated rather than product sold.
Furthermore, it’s perfectly possible to draft a distribution agreement so that the distributor pays an upfront fee for the right to be the distributor within a certain geographic location. This ensures that you will receive the same economic benefits from using a distribution agreement as you would from using a franchise agreement.
3. Why Would I Choose a Master Distribution Agreement over a Franchise?
There are two main reasons for choosing a master distribution agreement over setting up a franchise (if the structure is appropriate); cost and administrative burden. The costs of setting up a franchise can range from $50,000 at the lower end to hundreds of thousands of dollars at the upper end. You’re also required to comply with the Franchising Code of Conduct, which will cost time and money.
Using a master distribution agreement in the correct way resolves some of these issues.
4. What types of businesses is a Master Distribution Agreement appropriate for?
Clearly a master distribution agreement works better if you’re in the business of selling goods, not services, but at the end of the day the best way to work out whether a master distribution agreement might work for you as an alternative to a franchise agreement is by speaking with a lawyer.
Key takeaway
For businesses that have developed or designed a process or product that they’re considering franchising, a master distribution might be a less expensive alternative. Speak with a contract lawyer today to discuss your options by clicking here.
