Distributors or Dealers

A business may increase growth by appointing distributors or dealers to sell or distribute its goods or services. Distributors typically purchase product directly from a manufacturer, take title to the merchandise, and re-sell the products at such prices as the distributor determines. Distributors may or may not be granted exclusive territories within which to distribute the manufacturer’s products. Dealerships are similar to distributorships, but a Dealer typically purchases products from a Distributor, rather than directly from the manufacturer, and Dealers typically sell products at retail to the end user, as opposed to Distributors who typically sell product at wholesale to Dealers. In practice, the terms Distributor and Dealer are sometimes used interchangeably.
Some of the advantages of a distributorship or dealership include:
(a) lower capital expense by the manufacturer than adding company-owned outlets;
(b) the Distributor/Dealer assumes the risk of loss upon purchase of the product from the Manufacturer;
(c) the Distributor/Dealer becomes the responsible employer for its own employees;
(d) the Distributor/Dealer pays its own state and local business taxes;
(e) advertising expenses are incurred by the Distributor/Dealer, or at least shared with the manufacturer; and
(f) risk of failure is shifted primarily to the Distributor/Dealer.
Some of the disadvantages of a distributorship or dealership include:
(a) loss of control over the sales process;
(b) lower margins;
(c) potential dilution of trademark if products are sold in conjunction with Distributor/Dealer’s trademark; and
(d) the Distributor/Dealer may be selling a competitor’s product.
There are very subtle differences between a Distributor/Dealer relationship and a franchise relationship, and there are numerous instances where a purported Distributor/Dealer has been deemed to be a franchise. This often results in significant liability to the company if they have not complied with the franchise disclosure laws. Each Distributor/Dealer relationship should be carefully reviewed to confirm that it is not deemed to be a franchise. Laws regulating Distributorships and Dealerships (where they exist), are generally more lenient than laws regulating franchising or independent sales representatives.