There are different ways to enter a market and sell products and/or services. Many prefer to create their own products and services and sell them directly, while others prefer to work through franchisees or distributors.
Generally speaking, we very often see confusion between franchising and distribution. The importance of franchise and distribution agreements is widely underestimated. To see this, you only need to walk through the streets of Dubai and observe the multitude of franchise and/or distribution agreements. Did you know that the majority of products are presented to consumers through distributors or franchises?
However, there are essential differences between these two types of agreements and the relationship they seek to establish, and we strongly recommend that you consider them before getting started.
In this article, we will explain how these two agreements work and the differences between them.
Franchise agreements
Let us begin with franchise agreements in the Emirates.What is a franchise agreement in Dubai?
Franchising is simply a legal agreement under which a company, known as the franchisor, grants another company, known as the franchisee, the right to use and market its products or services. In exchange for this agreement, the franchisee provides the franchisor with direct or indirect financial compensation. All the terms of this agreement are duly recorded in the franchise agreement binding the two parties. More specifically, in a franchise agreement (think of Subway or any other restaurant or coffee brand), the franchisor is the party that owns the brand and sells the rights to a local franchisee, who will operate the business using the brand and know-how. Put simply, the franchisee purchases the right to market and sell items under the franchisor’s brand name. In the Emirates, there is no specific law governing franchises. This can cause problems in the event of a dispute between the franchisee and the franchisor, who may face a legal vacuum and a deadlock in resolving the dispute. This is why it is strongly recommended to consult a lawyer before entering into an agreement. We recommend contacting our partner Merritt Legal Consultants for appropriate legal support and advice tailored to your sector and the parties involved. This step is essential to avoid future problems and disputes.Distribution agreements
Distribution agreements, as their name suggests, are often used to import and distribute goods in the UAE. These agreements cover the terms for purchasing, selling, and reselling goods and services supplied by a supplier. They also cover the terms of sale by the buyer, who will distribute the supplier’s products within the territory. Distribution agreements are also governed by the UAE Civil Transactions Law and Commercial Transactions Law. Let us take the example of a supplier who wants its products to be sold in Dubai or the Emirates. Several structures and options are available:- It can choose to establish a company in one of the Emirates’ 45 Free Zones. Once established, this company can enter into a distribution agreement with another company, which will hold the distribution rights for the products. Until June 2021, a mainland distributor was required to have an Emirati partner who had to hold at least 51 of the company’s shares. The remaining 49 had to be shared among the company’s different shareholders. Only recently did the Emirates introduce major changes regarding the ownership of mainland companies. It is now no longer necessary to have an Emirati sponsor for commercial companies. Only service companies need a Local Service Agent to represent them before the authorities. Note that the latter holds no shares in the company and is in no way involved in managing or operating your business.
- Simply by entering into a contract with a distributor based in the Emirates while keeping your entity solely in your country of origin. This option allows the supplier to benefit from the distributor’s expertise and experience in the local market.
The essential differences between franchising and distribution
Use of the brand name
In a franchisor-franchisee relationship, the franchisee is expected to use the franchisor’s trademarks and brand names in the course of its business activities. The franchisor, for its part, is expected to provide marketing and training support. The aim is for the franchisee to succeed in its geographical area.Transfer of know-how
The main difference between the two lies in the concept of know-how. The franchisor transfers know-how, an image and reputation, and assistance to the franchisee so that it can operate and sell its goods and services. It is essential that the franchisee follow the franchisor’s guidelines in order to preserve the brand’s identity. A distribution agreement, on the other hand, only gives the distributor the right to resell the supplier’s products within a given territory. Under no circumstances will the supplier share its know-how with the distributor.Control
Based on what was discussed in the previous paragraph, it is clear that franchisors exercise much stricter and more extensive control over their franchisees, whereas a supplier in a distribution agreement is much less involved in and exercises much less control over the distributor. The law on commercial agencies in the Emirates The Emirates’ Commercial Agencies Law does not distinguish between the two types of agreement. The main difference between these two types of franchise and distribution agreements lies in the protections available to distributors under the Commercial Agencies Law when a distribution agreement is registered with the UAE Ministry of Economy. This can only happen if the agreement meets certain specific criteria, namely:- (1) the distributor must be a national or a company registered in the UAE, or be wholly owned by a UAE national or company;
- (2) the agreement is exclusive for all or part of the UAE territory;
- (3) the agreement must be notarized to be valid in the event of a dispute
