Distributor Vs. Franchise

Two of the most popular forms of small-business ownership are distributorships and franchises. Franchise systems are typically formal business operations, whereas distributors are typically middlemen used to sell and distribute products to retailers.

Government Regulation

The Federal Trade Commission has rules and regulations for business opportunity (such as distributorships) and franchise disclosure. These rules require companies to give consumers disclosure documents to offer them adequate information before they make an investment. The FTC website has detailed information about what to ask franchisors or distributors when investigating an opportunity.

Investment

Distributorships typically cost less than $20,000 to start. Most franchise businesses will cost five to 10 times that much.

Complexity

Franchise businesses typically create a product (food) or provide a service (tax preparation). Distributors, on the other hand, visit retailers to sell and stock products. Franchise businesses tend to be more complex to operate, as franchisees must monitor inventory, payroll and advertising. Distributors simply call on retailers and ensure the shelves stay full.

Overhead

Distributors' overhead may include storage of product and travel expenses. Franchise businesses typically have retail leases to pay, employees to hire and wholesale products to buy. Margins are typically lower in franchised businesses.

Flexibility

Distributors typically have more flexibility in their business activity, whereas franchisees are required to follow strict regimens in their business operations. Franchise documents will tell franchisees what their hours of operation should be and what products they must use in their business. Distributors simply must distribute their product and typically have complete flexibility in the methods used to do so.

References

• FTC Francise and Business Opportunity Rules
• Franchise vs. Business Opportunity