Different laws and regulations apply to franchises than distributorships, so owners of franchises and owners of distributorships will be subjected to different laws.
Before you enter into a franchise agreement certain information about the business you are getting into, including its costs and requirements, must be disclosed to you in compliance with the FTC Disclosure Rule. The standard way to make this disclosure is by being given a uniform offering circular (UFOC), which details all the information you are required to be informed of when entering into a franchise agreement.
It is so important to know whether you are part of or running a franchise or distributorship because you do not want to be caught off guard by not knowing what regulations you have to follow and what rights you might have. You are better off finding out for yourself whether you are franchise rather than having state regulators inform you of this fact after you have already violated regulations that you did not even know applied to you.
When a distributorship qualifies as a franchise can vary somewhat from state, but the Federal Trade Commission has laid out three basic elements that help to identify which distributorships are legally characterized as franchises:
- Use of a seller’s mark – One of the key principals about a franchise is that the distributors are granted the right, either expressly or impliedly, to use any of the seller’s trade names, logotypes, or any other commercial symbol belonging to the seller
- Seller’s control or assistance to the distributor ‘ A distributorship can qualify as a franchise when the seller provides requirements that the distributor must follow, such as standard hours of operations or appearance requirements. Also, the seller may provide assistance and benefits such as training programs for employees
- Payment by the distributor to the seller – Many times the seller will not charge something called a "franchise" fee so as to avoid to being designated a franchise. However, the FTC generally regards any payment that has to be made by the distributor to the seller in the first 6 months of the agreement as a franchise fee, and so the relationship between the seller and distributor is designated to be a franchise relationship
If I Am Not Sure Whether the Distributorship I Am Involved in Qualifies as a Franchise, What Can I Do?
You may consider consulting with a business attorney who has experience dealing with franchise agreements. Your attorney can help you interpret your state laws as well as federal law, and let you know if your distributorship would fall into the category of a franchise. If you do end up qualifying as a franchise, your attorney can let you know what regulations you should be following and what rights you have in this type of relationship.