Full Answer
When did auto franchising become common?
Who invented the franchise car?
How does RMA affect prices?
How does exclusive territory help auto dealers?
Why is franchising mandatory?
How many dealerships were terminated in 2009?
What are the legal protections for dealerships?
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About this website
Which States Are Franchise Registration States? - Lanard and Associates
If you are a new franchisor, you must be aware of not only the federal franchise law that requires disclosure of certain information to a prospective investor in a franchise, but you must also be aware of state franchise laws.
Markets: State Franchise Laws, Dealer Terminations, and the Auto Crisis
Markets: State Franchise Laws, Dealer Terminations, and the Auto Crisis by Francine Lafontaine and Fiona Scott Morton. Published in volume 24, issue 3, pages 233-50 of Journal of Economic Perspectives, Summer 2010, Abstract: In fall 2008, General Motors and Chrysler were both on the brink of bankrup...
State Franchise Laws | Franchise Registration States
State Specific Franchise Laws for Franchisors. The offer and sale of a franchise requires compliance with federal and state franchise laws. Franchisors must develop, maintain, register, and disclose a uniform Franchise Disclosure Document (FDD). The FDD must be registered in the franchise registration states, filed in the franchise filing states, and disclosed in every state to prospective ...
What are dealer franchise laws?
These laws are, in most cases, regulated on the state level and federal courts repeatedly uphold the validity of states to regulate the buying and selling of cars through dealer franchise laws. Dealer franchise laws also benefit several different parties, including consumers, manufacturers, and the local communities that dealerships operate in. 1.
How many Americans are employed by franchised car dealerships?
According to NADA, locally franchised dealerships employ more than 1.1 million Americans and 15% of all state and local tax revenue comes from dealerships. By keeping these laws at the state level, dealership franchises can keep everyone—not just themselves—protected.
What are the benefits of franchise dealerships?
You should always remember the benefits of the franchise dealership model as well. Consumers can comparison shop for the best prices, you’re able to protect consumers by servicing recalls and warranty repairs, and the local community thrives in the process. Keep putting the effort in to make your dealership one of the best, and the future will only look bright.
Why is price important in franchise?
Price is a significant benefit for consumers when it comes to franchised dealerships. When dealerships are selling the same brand or brands within close proximity of each other, there’s competition that goes on to keep prices low and have multiple financing options available.
Why do people buy cars directly from manufacturers?
The fact of the matter is that many consumers have expressed an interest in buying direct from manufacturers because they don’t like negotiating on price. More manufacturers will undoubtedly start looking into the direct sales route as a way to make the car-buying process much more transparent.
Why are cars governed so strictly?
You don’t usually have to follow any particular laws when buying clothing, electronics, or home goods—so why are cars governed so strictly? It’s because the entire auto industry is highly regulated. From needing a driver’s license to operate a motor vehicle, to requiring insurance, to receiving fair financing, buying a car is no joke. Cars are expensive, contain hazardous materials, and require maintenance by trained technicians. And if a driver uses a car incorrectly, people can end up hurt or killed.
Is direct to consumer a fast moving change?
A direct-to-consumer future may seem pretty depressing for franchise owners, but as of now, it doesn’t seem like it’s going to be a fast-moving change. You can also take this time to think about what customers prefer about the direct route—convenience, transparency, no haggle pricing—and figure out ways to incorporate that into your own dealership’s business model.
When did auto franchising become common?
State auto franchising regulations have become ubiquitous during the past three decades. As figure 1 shows, all three types of laws—franchise licensing requirements, exclusive territories, and dealer termination provisions—became more common between 1979 and 2014. During those 30 years, states enacted 31 new laws on those topics. In 1979, fewer than half of all states regulated all three aspects mentioned above. By 2014, all but one state regulated every single one of these aspects.
Who invented the franchise car?
The first automobile franchise was established by William Metzger, who purchased the right to sell steam engine cars by General Motors in 1898. 1 What started as a voluntary agreement between a manufacturer and a retailer has turned into a mandatory requirement in all 50 states and in US territories. 2 State auto franchise laws extensively regulate the contractual obligations between manufacturers and dealers. They prevent manufacturers from selling new vehicles (and related services) directly to the public, often mandate exclusive territories for dealers, and make it difficult for manufacturers to terminate dealers.
How does RMA affect prices?
RMA statutes help insulate dealers from competition. Without the threat that the manufacturer might open other competing franchises, existing dealers have the opportunity to charge consumers higher prices. 24 Since almost all states now have RMA laws, it is difficult to estimate how RMAs affect prices today. In the mid-1980s, when RMAs were less prevalent, Federal Trade Commission economists estimated that they increased the price of new cars by approximately 6 percent. 25 The percentage is arguably lower now, because the Internet has increased competition between dealers. A 2001 study found that Internet referral services save consumers about 2 percent on new car purchases 26 —a figure consistent with the hypothesis that the Internet has reduced, but not eliminated, the price-increasing effects of RMA laws.
How does exclusive territory help auto dealers?
Exclusive territories can further encourage dealers to invest in sales and service efforts by making it harder for consumers to visit a high-service dealer to learn about the vehicle but then buy it from a low-service dealer who can offer a lower price because he has not made a similar investment in sales and service efforts. Restrictions on termination can also spur dealer investment in both physical location and customer service by removing the risk that the manufacturer will demand further concessions from the dealer after the dealer has made the investments. Dealer sales and service efforts do not just benefit manufacturers; they also benefit consumers. 13
Why is franchising mandatory?
Mandatory franchising also prevents established manufacturers from selling directly to the segment of consumers who might prefer to avoid the dealership and simply order a car from the manufacturer, the same way many consumers buy built-to-order computers from manufacturers. Gary Lapidus, formerly a US auto industry analyst for Goldman Sachs, estimated that a build-to-order system could save consumers $2,225 on the price of a new car, based on an average price of $26,000 per car. 18 A position paper prepared for the National Automobile Dealers Association (NADA) disputes this figure, labeling it “a math exercise that assumed that such expenses would vanish in a direct distribution model.” 19 Since manufacturer direct sales are illegal in all 50 states, neither manufacturers nor consumers have the opportunity to find out.
How many dealerships were terminated in 2009?
Dealers wasted no time petitioning Congress to reverse the planned dealer terminations. The 2010 Consolidated Appropriations Act (H.R. 3288) included a provision, Section 747, which provided the opportunity for “covered dealerships” to reacquire franchises terminated on or before April 29, 2009 through an arbitration process. 10 The provision affected all 2,789 dealerships slated for termination; however, the total count of dealers who decided to file paperwork to enter the process was 1,575. Of the cases that went to hearings, arbitrators allowed the manufacturers to close 111 dealerships and ruled in favor of 55 dealers. The other cases were settled or withdrawn. 11
What are the legal protections for dealerships?
Another legal protection provided to dealerships is restrictions on dealer terminations. Currently, every state has laws preventing dealership terminations except for “good cause.” 27 The definition of “good cause” varies by state, but it usually focuses on factors like a dealer’s conviction for a felony, fraud, insolvency, or failure to comply with a material term of the franchise agreement. States do not typically regard a manufacturer’s desire to improve the efficiency of its dealer network as “good cause” to terminate dealers. Moreover, once a manufacturer has explained its “good cause,” many termination laws also give the dealership a period of time (often 180 days) to correct the error. 28
Why do auto dealers hold up?
The holdup problem occurs if manufacturers can appropriate a portion of dealer-specific investments through opportunistic behavior. Generally this derives from dealer concern about a manufacturer's installing a second dealer within a dealer's established territory, thereby eroding the first dealer's profitability. The same concern can apply to competition from manufacturer direct sales. As a matter of economic theory, holding up dealers is unlikely to be a viable long-run strategy for a manufacturer when, as in the auto industry, reputation is important. Opportunistic behavior by a manufacturer would erode its reputation, making it difficult to attract new dealers and have existing dealers continue to provide the promotion and service essential to attracting those customers not buying directly from the manufacturer.
How does the internet affect auto dealers?
With the advent of the internet, some of the mutually beneficial nature of the franchise system for manufacturers and dealers has diminished, as information and access to services historically provided primarily by dealers has become more readily available. Online buying services are an obvious example. In addition, a variety of auto information, including pricing data and reviews, can be found online from sites like Edmunds and Consumer Reports. This raises the prospect of disintermediation, broadly defined as direct-to-consumer sales through reduction or elimination of the role of retailers. With respect to autos, unlike the situation with books and CDs, most customers probably will continue to want some hands-on contact with the product before purchasing, likely implying a continuing, though possibly changed, role for dealers. Since the internet can potentially provide manufacturers with better information on consumer preferences than the traditional local franchised dealer, direct manufacturer sales may be one way through which that changed dynamic occurs.
What is direct sales to car buyers?
With dealer networks being rationalized as part of cost-cutting initiatives, direct manufacturer sales to car buyers may present an additional opportunity to lower distribution costs. Such sales might range from consumers' simply ordering assembled vehicles of their choice directly from automakers to a scenario along the lines of the "Dell Direct" build-to-order model that revolutionized the personal computer production and sale process. GM initiated a build-to-order sales model in Brazil for its Chevrolet Celta economy car over eight years ago. In 2008, the Celta was among the sales leaders in Brazil. (3) At the time of the Celta's introduction, an auto analyst said that build-to-order could result in "spectacular improvements in the company's competitiveness and profitability." (4)
Why are direct car sales important?
Direct manufacturer car sales may have the potential to reduce inventory costs. The salient point is that whether or not direct manufacturer sale of autos is to evolve as a distribution channel in the United States should be determined by the preferences of consumers and the ability of auto producers to meet those preferences, rather than being precluded by fiat. If state laws prohibiting direct manufacturer auto sales remain in effect, automakers may be frustrated from making one type of long-run adjustment to reduce costs that could play a role in their efforts to restructure.
How much has GM received from TARP?
Automakers General Motors Corporation (GM) and Chrysler LLC have received $17.4 billion in loans under the Troubled Asset Relief Program (TARP) and have indicated that they may need up to an additional $21.6 billion in federal assistance to restructure their operations. (1) As a condition of the loans, the companies are required to develop plans to achieve profitability. Much attention in the plans has centered on getting labor costs under control. Among other measures addressed are ways to cut distribution costs. As part of its cost-cutting effort, GM has announced that it will reduce its dealership network from over 6,200 dealers today to 4,100. The cost of the auto distribution system in the United States has been estimated as averaging up to 30 percent of vehicle price. (2)
What is antitrust division?
The Antitrust Division encourages independent research by its economists. The views expressed herein are entirely those of the author and are not purported to reflect those of the United States Department of Justice. State franchise laws prohibit auto manufacturers from making sales directly to consumers.
Why do dealerships sell cars?
Selling through dealerships has offered several benefits to manufacturers historically. Auto production is a capital-intensive business and a franchise system allowed manufacturers to concentrate their resources upstream while accessing capital through franchise fees from independent entrepreneurs at the retail level. Economies of scale in auto production also required having relatively few, large manufacturing operations located near essential supplies like steel. This contrasted with the nationwide distribution network needed to reach consumers, who could be more effectively served through local dealerships in a better position to assess demand in particular markets and to provide service and repairs.
Why are dealerships allowed to franchise?
In response, states began passing laws to protect local franchises from alleged abuses by automobile manufacturers. Today, all states have dealership-friendly franchise regulations, including laws that give automobile dealerships territorial exclusivity and encroachment protections from competition. These laws limit market entry and reduce price competition between dealers selling the same brands and models, leading to higher consumer prices. A study in 2015 quantified the effects of the geographic distribution of dealerships and found that the price of a Honda Accord increased by $500 when dealers were 30 miles apart.
How much return on equity does a car dealership have?
Although car dealerships try to justify these protections by portraying themselves as struggling small businesses, the reality is that the industry as a whole averages about a 30 percent return on equity for domestic vehicles. By contrast, the automobile manufacturing industry, where competition is thriving, has not managed to reach 8 percent in profits in any year during the last decade. Because state laws make little distinction between large and small dealers or between wealthy or struggling ones, the focus of these laws is not to help the “little guy.”
Why are state laws not to help the little guy?
Because state laws make little distinction between large and small dealers or between wealthy or struggling ones, the focus of these laws is not to help the “little guy.”. Public policies that impose regulations on businesses do not spare consumers the cost.
Do regulators prop up poorly performing businesses?
It is not the role of regulators to prop up poorly-performing businesses or tilt the playing field in favor of any industry or interfere with private business contracts. Dealerships have benefited from this corporate welfare for decades, costing Americans consumers billions of dollars. It needs to stop.
Can a dealership be terminated?
Along with exclusive territories and market entry barriers, many states have laws constraining dealership termination. Under many of these statutes, even gross inefficiency and poor financial condition are not legitimate grounds for termination.
Who was the first to develop a franchise contract?
But slightly before that, Albert Singer, who had had difficulty marketing sewing machines, found success in franchising as a way to sell his machines in the 1860s. He is credited as having been the first to develop a franchise contract.
When did franchising become fashionable?
Fast Forward to Fast Food. Franchising grew more fashionable in the mid-1900s in the US when a new type of franchise popped up in the form of retail and fast food chains.
What was the industry in the 1960s?
By the 1960s, the franchising industry was booming. Everything from auto supplies to hotels, convenience stores, and plumbing, was being franchised. But this explosion also created problems, and franchising gained a bad reputation. Many franchises sprouted up that were less than scrupulous and were under-funded.
Is franchising a new thing?
You might assume that franchising in the United States is a relatively new thing. Actually, it’s pretty mature, though there is some debate about who the first franchisor was.
Is franchise investment speculative?
As a result of these practices, investing in a franchise was considered a speculative investment.
Who invented the odometer?
But even further back, we have a familiar name: Benjamin Franklin. In addition to inventing many common items like bifocal glasses and the odometer, he also created what was the first documented franchise, though it was called a “co-partnership,” in 1731 in Philadelphia.
Is franchising a regulated business?
Franchising became a highly regulated area of law requiring franchisors to provide a disclosure document (originally the Uniform Offering Circular and now the Franchise Disclosure Document) to prospective franchisees.
What is the Maine Motor Vehicle Franchise Board?
The Maine Motor Vehicle Franchise Board, as established in Title 5, section 12004-G, subsection 6-Band referred to in this chapter as "the board," is established for the purpose of enforcing the provisions of thischapter. [2003, c. 356, §12 (NEW).]
What are written agreements between a manufacturer, wholesaleror distributor and a motor vehicle dealer?
Written or oral agreements between a manufacturer, wholesaleror distributor with a motor vehicle dealer including, but not limited to, the franchise offering, the franchiseagreement, sales agreements, policies and procedures agreements, bulletins or manuals, sales of goods,services or advertising, leases or mortgages of real or personal property, promises to pay, security interests,pledges, insurance contracts, advertising contracts, construction or installation contracts, servicing contracts,and all other such agreements in which the manufacturer, wholesaler or distributor has any direct or indirectinterest, are subject to this chapter.
Who is liable for damages to new vehicles after acceptance?
Liability of a new dealer after acceptance. Notwithstanding the terms, provisions or conditions ofany agreement or franchise, the new motor vehicle dealer is solely liable for damages to new motor vehiclesafter acceptance from the carrier and before delivery to the ultimate purchaser.
How much did franchise sales in 1985 reach?
Sales by business format franchises tripled from $16 billion in 1971 to $48 billion in 1979. — In 1985, retail sales of franchises exceeded $474 billion. F. Big Overall Growth Returns – 1986 to 1995.
What does franchising mean?
In Old French, it is “franc,” signifying free. The French term “francis” means granting rights or power to a peasant or serf. The English term “enfranchise” is defined as empowering those who have no rights. The term “Royal Tithes” is the predecessor of royalties, and originated as the practice of certain English men (referred to as “freemen”) receiving a percentage of the land fees paid by serfs to nobility. Throughout history, franchising has promoted economic liberation, synergy, and opportunity, and has been true to its etymological roots – “freeing” commerce from many of the traditional chains that had bound it. Naisbitt’s famous comment in Megatrends is no exaggeration – “Franchising is the single most successful marketing concept ever.”
What is the FFFPA?
Although federal legislation has never been adopted, over the last decade the Congress repeatedly introduced a version of the Federal Fair Franchising Practices Act (“FFFPA”), initially introduced by Congressman John LaFalce (D-NY) in the early 1990’s. The bill would allow a private right of actions for damages, recovery of attorneys’ fees, as well as actions by state attorneys general. The bill would regulate both disclosure and the franchise relationship, and addresses fraud, discrimination in the sale of franchises, termination and cancellation, purchasing requirements, non-competition clauses, fiduciary, good faith, and due care duties, encroachment, and mandatory arbitration. After Chairman LaFalce lost the Chair of the Small Business Committee in 1995, the prospects for successful passage of the bill became remote, although efforts are ongoing.
How many gallons of rum did the Singer franchisee import?
The franchisee was granted the right to import 45,000 gallons of rum over three years in exchange for building the Sydney Hospital (the so-called “rum hospital”). — In the United States during the mid-1800’s, trademark/product franchising developed when the Singer sewing machine company formed a franchise in 1851.
What is the IFA code of ethics?
To counter the claims of abuse in franchising, the International Franchise Association (IFA) instituted self-policing mechanisms including a Code of Ethics, and organizations such as the American Association for Franchisees and Dealers (AAFD), and the American Franchise Association (AFA) began to flourish.
What was the antitrust charge in the 1960s?
Leading the charge in the 1960’s were the Antitrust Division of the Department of Justice (which also took an aggressive stand on mergers and acquisitions during this period), as well as the FTC.
When did franchising collide with antitrust laws?
III. Franchising’s Collision With Antitrust Law – 1949 to 1980. Following the Supreme Court ruling in 1949 in Standard Oil v. United States, franchisors operated in a legal quicksand, unsure of whether their actions constituted violations of the federal antitrust laws.
When did auto franchising become common?
State auto franchising regulations have become ubiquitous during the past three decades. As figure 1 shows, all three types of laws—franchise licensing requirements, exclusive territories, and dealer termination provisions—became more common between 1979 and 2014. During those 30 years, states enacted 31 new laws on those topics. In 1979, fewer than half of all states regulated all three aspects mentioned above. By 2014, all but one state regulated every single one of these aspects.
Who invented the franchise car?
The first automobile franchise was established by William Metzger, who purchased the right to sell steam engine cars by General Motors in 1898. 1 What started as a voluntary agreement between a manufacturer and a retailer has turned into a mandatory requirement in all 50 states and in US territories. 2 State auto franchise laws extensively regulate the contractual obligations between manufacturers and dealers. They prevent manufacturers from selling new vehicles (and related services) directly to the public, often mandate exclusive territories for dealers, and make it difficult for manufacturers to terminate dealers.
How does RMA affect prices?
RMA statutes help insulate dealers from competition. Without the threat that the manufacturer might open other competing franchises, existing dealers have the opportunity to charge consumers higher prices. 24 Since almost all states now have RMA laws, it is difficult to estimate how RMAs affect prices today. In the mid-1980s, when RMAs were less prevalent, Federal Trade Commission economists estimated that they increased the price of new cars by approximately 6 percent. 25 The percentage is arguably lower now, because the Internet has increased competition between dealers. A 2001 study found that Internet referral services save consumers about 2 percent on new car purchases 26 —a figure consistent with the hypothesis that the Internet has reduced, but not eliminated, the price-increasing effects of RMA laws.
How does exclusive territory help auto dealers?
Exclusive territories can further encourage dealers to invest in sales and service efforts by making it harder for consumers to visit a high-service dealer to learn about the vehicle but then buy it from a low-service dealer who can offer a lower price because he has not made a similar investment in sales and service efforts. Restrictions on termination can also spur dealer investment in both physical location and customer service by removing the risk that the manufacturer will demand further concessions from the dealer after the dealer has made the investments. Dealer sales and service efforts do not just benefit manufacturers; they also benefit consumers. 13
Why is franchising mandatory?
Mandatory franchising also prevents established manufacturers from selling directly to the segment of consumers who might prefer to avoid the dealership and simply order a car from the manufacturer, the same way many consumers buy built-to-order computers from manufacturers. Gary Lapidus, formerly a US auto industry analyst for Goldman Sachs, estimated that a build-to-order system could save consumers $2,225 on the price of a new car, based on an average price of $26,000 per car. 18 A position paper prepared for the National Automobile Dealers Association (NADA) disputes this figure, labeling it “a math exercise that assumed that such expenses would vanish in a direct distribution model.” 19 Since manufacturer direct sales are illegal in all 50 states, neither manufacturers nor consumers have the opportunity to find out.
How many dealerships were terminated in 2009?
Dealers wasted no time petitioning Congress to reverse the planned dealer terminations. The 2010 Consolidated Appropriations Act (H.R. 3288) included a provision, Section 747, which provided the opportunity for “covered dealerships” to reacquire franchises terminated on or before April 29, 2009 through an arbitration process. 10 The provision affected all 2,789 dealerships slated for termination; however, the total count of dealers who decided to file paperwork to enter the process was 1,575. Of the cases that went to hearings, arbitrators allowed the manufacturers to close 111 dealerships and ruled in favor of 55 dealers. The other cases were settled or withdrawn. 11
What are the legal protections for dealerships?
Another legal protection provided to dealerships is restrictions on dealer terminations. Currently, every state has laws preventing dealership terminations except for “good cause.” 27 The definition of “good cause” varies by state, but it usually focuses on factors like a dealer’s conviction for a felony, fraud, insolvency, or failure to comply with a material term of the franchise agreement. States do not typically regard a manufacturer’s desire to improve the efficiency of its dealer network as “good cause” to terminate dealers. Moreover, once a manufacturer has explained its “good cause,” many termination laws also give the dealership a period of time (often 180 days) to correct the error. 28