The process of drawing up a franchise agreement and setting up a franchise is an extremely expensive undertaking. Franchises are also heavily regulated both by the Franchising Code of Conduct and the Competition and Consumer Act 2010. Complying with the regulations set out in the above mentioned legislation is time consuming and costly.

There is, however, an alternative: a master distribution agreement. This article explains how a master distribution agreement works and why you might want to consider using one rather than setting up a franchise with a franchise agreement.

1. Upfront Payments – Do I need a Franchise Agreement?

One of the main concerns brought forward by businesses looking at the franchise agreement / master distribution agreement choice relates to the concept of the upfront payment. Obviously using a franchise agreement allows you to take a large upfront payment from franchisees purchasing a franchise. The amount you can charge for this will depend on the strength of your franchise and the earning potential the franchisee acquires post-purchase. Franchisors will then generally take a cut of the annual or monthly revenue generated by the franchisee.

A distribution agreement normally works differently. The distributor simply pays a percentage margin on all sales generated from products sold under the distribution agreement. There is, however, no reason why you can’t structure your distribution agreement to reflect many of the economic realities of a franchise agreement.

Under a master distribution agreement you can require the distributor to pay an upfront fee for the right to be either an exclusive or non-exclusive distributor of your product in the relevant area. You can also build in a requirement for the distributor to pay you either a regular amount of revenue on a monthly or annual basis, or a percentage of all revenues generated.

You can therefore set up an arrangement which provides you with most of the economic benefits that a franchise agreement would, for a lower cost and a less ongoing management effort.

2. Administrative Burden – Franchise Agreement or Master Distribution Agreement

Clearly setting up a franchise will mean taking on a significant administrative burden. You will need to comply with the relevant legislation, and your franchisees will expect support, documented “how-to” manuals, training and the like. If you don’t want to provide this additional support, or are not in a position to, a master distribution agreement can be a good alternative. The agreement will make it clear what you, as the manufacturer, are providing to the distributor. You can restrict this to simply supplying the goods if you want.

3. Distribution Agreement or Master Distribution Agreement?

There’s no substantive difference between a distribution agreement and a master distribution agreement. The use of the word “master” really relates to a document that allows you to chop and change some of the important terms (such as the payment terms) depending on the distributor you’re dealing with. If you can get your lawyer to draft you a document with a number of alternative clauses which you can then use depending on the individual distributor you will be able to save a substantial amount in legal fees.

Conclusion

If you have developed a product or process that you think might be worth franchising, but you don’t want to go through the effort and expense of setting up a franchise through a franchise agreement, you can consider using a master distribution agreement. It’s a flexible and less expensive alternative! Our experienced franchise solicitors are ready and waiting to answer your questions.

Lachlan McKnight

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