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 Does It Matter Whether My Distributorship Qualifies as a Franchise?

Different laws and rules apply to franchises and distributorships, so owners of franchises and distributorships will be subjected to different laws.

What Happens When I Enter a Franchise Agreement?

Before you enter into a franchise agreement, specific details about the business you are getting into, including its expenses and prerequisites, must be disclosed to you in compliance with the FTC Disclosure Rule.

The traditional way to make this disclosure is by being given a uniform offering circular (UFOC), which describes all the information you must be informed of when entering into a franchise agreement.

Why Is It Important to Know Whether You Are a Distributor or a Franchisee?

It is essential 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 understanding what regulations you have to observe and what rights you might have.

You are better off finding out whether you are a franchise rather than having state regulators notify you of this fact after you have already overstepped regulations that you did not even know applied to you.

When Is My Distributorship a Franchise?

When a distributorship qualifies as a franchise can vary somewhat from state to state. Still, 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 fundamental principles about a franchise is that the distributors are granted the right 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 conditions that the distributor must obey, such as standard hours of operations or appearance requirements. Also, the seller may deliver aid and benefits such as training programs for employees
  • Payment by the distributor to the seller – Often, the seller will not charge something called a “franchise” fee to avoid being designated a franchise. The FTC typically considers 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.

What Is Wholesale Marketing?

In a wholesale transaction, you sell quantities of your work to a dealer or retailer, usually at a discount. You get a higher volume of business, and your buyer gets a discount. That individual then resells your work to their customers. Wholesale transactions can occur at craft shows, directly between galleries and artists, or sometimes with the aid of agents.

A wholesale order can be exhilarating, but you need to think through the terms before accepting it.

Items to consider include:

  • Will you propose credit or other payment terms? If you do, can you “carry” your customer until they pay?
  • Is the customer creditworthy? What will happen to your business if your customer goes bankrupt? Are you putting all your eggs in one basket? When in doubt, don’t extend credit.
  • Do you have a wholesale order form? Or a signed purchase order or contract? Make sure it contains an agreed-upon cancellation fee. This is very necessary if you are extending any credit.
  • Do you have a volume discount schedule? This authorizes the consumer to get a more significant discount when they purchase more units
  • Are you selling on a returnable basis or a non-returnable basis? Non-returnable sales will help you reduce returns, but clients often expect a more significant discount.

What Are Consignment Sales?

A consignment transpires when you provide work to a reseller (the “consignee”), who arranges to pay you proceeds from the sales minus a commission. If your product doesn’t sell, the consignee can return it. Under this agreement, the consignee takes minimal risk because it doesn’t have to buy goods. The advantage is that it delivers access to sales venues that you might not otherwise open.

Consignment sales can be big business. Consignments account for more than $3 billion annually in the United States in craft sales alone.

These numbers can be exhilarating, but before you jump into consignment sales, you should consider:

  • The credit or references of your consignee
  • Having a written consignment agreement that spells out the inventory being consigned and other details
  • The retail price the goods will be sold for
  • The consignee’s expenses
  • Who pays for shipping and other matters that will impact your ability to realize a profit on your goods
  • The type and amount of insurance that the consignee will carry to protect your goods
  • When the deal will conclude
  • How disagreements will be settled.

Collecting Payment

You may have issues amassing what you are owed no matter what you sell. The best way to avoid problems is to minimize them upfront with sound policies and carefully offer credit on bigger orders.

If you have a customer who does not pay and you can’t work out a plan, you have several collections options:

  • Turn the account over to a collection agency.
  • Sue in small claims court.
  • Hire a lawyer

What Are Distribution Agreements for Commissions?

Many distribution agreements contain a clause providing what the distributor gets paid for selling the product and a commission based on the number of products it sells. Commissions give the distributor the added incentive of selling as much of the supplier’s product as possible. The distributor obtains a percentage of the general sales, so the more it sells, the more money both parties make.

What Is an Exclusive Distribution Agreement?

Both parties can employ an exclusive distribution agreement. Sometimes, the distributor is the only distributor of the supplier’s product within a specific geographical location. In other exclusive contracts, the distributor has the sole authority to sell the product to specific clients, meaning no other distributor can sell to those customers. Exclusive agreements are often used when the product is costly, particular, or technical, requiring special knowledge of the goods and the market.

If your business is considering using an exclusive distribution agreement, consider reviewing with an attorney to ensure that your business is not disregarding any antitrust regulations for free competition.

What Is a Wholesale Distribution Agreement?

A wholesale business supplies its products in bulk, typically at a cheaper cost than if it were selling the products retail. Wholesale distribution deals are usually made-up terms to define the type of transaction. However, the basic idea is that the distributor contracts with a wholesale company to sell items in bulk, either to a retail store for customers to purchase or directly to customers.

Occasionally, the wholesale distributor purchases the product from the supplier and becomes its owner, letting the wholesaler sell to the next business for a profit.

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 and federal law and let you know if your distributorship would fall into the category of a franchise. If you qualify 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.

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