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A distributorship is a business arrangement that grants the right to use an operational method, a manufacturing method, or a method of providing a service. These three types of distributorship opportunities are also known as franchises. The originator of the method is known as a franchisor, and the distributor is referred to as a franchisee. Contractual rights include use of trademarks and branding, rights to manufacture, and access to management methods developed specifically for that operation.
Distributorship opportunities can involve either a product franchise, a business franchise, or a manufacturing franchise arrangement. In all three cases, the franchisee typically will pay the franchisor an initial licensing fee as well as ongoing royalty fees. The latter fees are generally tied directly to the sales the franchise generates, and are usually computed as a percentage of sales. Specific formulas and rates for calculating franchise fees vary.
A product franchise grants the right to distribute a product while using the manufacturer's brand name and trademark. This carries the advantage of providing the franchisee with instant name recognition in the marketplace. Using the reputation connected to the brand name typically gives a franchisee an advantage over a start-up business that has to build its own brand recognition. Possessing that name recognition from the start is why franchisees generally have a higher-than-average success rate in launching a business.
A manufacturing franchise allows a franchisee to manufacture a product. Typically, the franchisor will require manufacturer to meet certain specifications and may require the franchisee to use a particular brand of equipment in the manufacturing process. The right to use the franchisor's brand name and trademark is generally included in this arrangement. However, this is not always the case.
Instead of licensing the right to sell a product or service, a business franchise arrangement grants the franchisee rights to use a proven business operations formula. Distributorship opportunities may be combined. For example, a franchisee may contract with the franchisor to obtain use of branding, use of manufacturing operational plans, and use of a proven formula for business operations. If this distributorship includes the plans for the physical layout of the business, it is often referred to as a turnkey operation.
Distributorship opportunities are popular, due in part to the advantage of having access to the research and development that has already been invested by the franchisor. Franchise agreements come under the regulation of regional and national laws, in order to ensure the protection of both parties. These laws typically require specific disclosures, particularly directed toward the protection of the franchisee. Even with disclosures, regulatory authorities recommend thoroughly researching distributorship opportunities before signing a contract.
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