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Getting into bed with another business? Working together can bring reward and mutual satisfaction but how you structure your relationship will be key to your long-term success.
There are many ways in which you might look to work with another business. This could range from a formal joint venture, a licensing arrangement, a franchise arrangement, a distribution arrangement or an agency agreement. How do they work and what should you be aware of?
This usually involves setting up a new company whose shareholders are the individuals or companies who have put some involvement into the joint collaboration. The amount of shares that each collaborator receives is generally proportionate to their investment. In joint ventures it is common for collaborator investment not to be cash, but resources, ‘know-how’, intellectual property, equipment or other assets. Generally each collaborator has a representative on the Board of Directors. The rights and obligations on each collaborator and on the joint venture company are set out in a Joint Venture Agreement. This is a very important document as it sets out how the joint venture will regulate itself and how it will be unravelled should the relationship between the collaborators breaks down.
It is common for someone who has developed a product or a process, but who does not have the resources to manufacture the product and exploit it or the process, to license the manufacture or exploitation of the process through a Licensing Arrangement. The licence will contain all of the commercial terms on which the relationship is created. Consequently, it is important to ensure that the licence is well drafted and commercially sound.
Franchising is where a person (the franchisor) has set up a business and has created in that business a system, a brand (which is usually trade marked) and a reputation in its product or services which can be passed on to other people who would like to run a similar business (the franchisee). Franchising can be a very good way to grow a business quickly for the franchisor and an easy way for an inexperienced person to set up and start a new business because the idea, the methods and the reputation are already established.
Successful franchises tend to have the following traits:
The franchisor
And the franchisees
Distribution is a situation where you want to sell the products of a manufacturer or an importer within a given geographical territory. The distributor buys the products from the manufacturer and then sells them on for a profit. All the terms of the arrangement are set out in a Distribution Agreement. This is a very important document as it sets out all of the commercial terms on which the seller and the distributor trade. The agreement will include:
Distribution arrangements are generally good for a manufacturer that does not have its own marketing and sales team in a particular territory. It is an arrangement that is good for the manufacturer’s cash flow because the manufacturer often gets paid at the point of delivery to the distributor although this isn’t always the case. It is always important to the manufacturer that it appoints good active distributors who are going to be able to sell significant amounts of the product so manufacturers or suppliers should take care when deciding who to appoint as a distributor.
This situation is where you, as Agent, act as the marketing and sales team for a manufacturer or service provider (the Principle). You find customers for the products or services and then the customer buys the products or services directly from the Principle. The Agent is then paid a percentage of the sale price on each sale. All of the commercial terms of the agency are set out in an Agency Agreement, so this is a very important document for both parties. The benefit for the Principle is that it does not have to pay for a marketing and sales team. The benefit to the Agent is that it does not have any financial outlay, unlike a distributor. In recent times agency arrangements have become less popular with Principles because of the compensation rights that some agents are now entitled to claim when the agency arrangement is terminated.
If you are thinking about appointing an agent you should take the advice of a business law solicitor before embarking on this to ensure that you understand any long term liabilities that may apply in your case.