FYI: Business HotlineGrowing Pains

Want to expand your business? Don't let legal issues choke your growth.
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This story appears in the November 1996 issue of Entrepreneur. Subscribe »

Q: I have been running a gift basket business from my home for the past four years. I am interested in furthering my reach to other states and am considering offering distributorships to interested consumers. After advertising this offer, I was overwhelmed with calls from interested people. What are the liabilities, tax problems and overall guidelines I'd have to adhere to? Any help you could offer would be appreciated.

Name Withheld

A: Andrew A. Caffey is a practicing attorney in the Washington, DC, area, the former General Counsel of the International Franchise Association, president of the American Business Opportunity Institute Inc., and a recognized specialist in franchise and business opportunity law:

The distribution of any product or service raises a number of legal issues. I don't believe, however, that the legal tail should wag the business dog. The first task is for you to carefully describe, in as much detail as possible, the business aspects of your distributorship. For instance, how would you answer these questions:

*Have you developed a trademark to identify your baskets or your business? Do you expect that your distributors will want--or need--to use your trademark to identify the product or their business? Will they be an "authorized distributor" of your line?

*Will you provide a toll-free number for consumers to place orders (which will then be filled by the local distributor), or will you provide marketing assistance for the distributor in his or her market? Do you plan to print promotional materials that you will give or sell to your distributors for their use?

*Will it be important to designate a territory to be served by each distributor? Is it important that distributors not compete with one another? If you have a national contract with Macy's department stores, for instance, and the basket line appears (through your efforts) at a Macy's store in a distributor's territory, how do you think this conflict should be handled? Should you impose purchase quotas on the distributor to retain exclusivity in a territory?

*Will a distributor buy a supply of product from you (to which he or she then has ownership) or will he or she handle your product on a consignment basis (so that you retain ownership of the product)?

*What do you think will be the profile of your typical distributor? Do you expect them to be people who are new to business, or will you be working with full-time professional distributors who already carry other product lines? If you will be using people new to business, will you provide training? What other assistance will you provide?

*What will the financial arrangements be? Do you plan to charge fees to cover your expenses or training? Will training be mandatory or optional? Will you charge a fair price for promotional materials? How will you price the product you sell? Will you require distributors to purchase a certain amount of inventory to get started in the business?

The dimensions of your business relationship will answer most of the legal questions that hang over the creation of a distribution system. It may be regulated as a franchise, a business opportunity, an independent contractor relationship or, conceivably, an employment relationship. Each type of relationship has its own rules and regulations.

If it is a franchise, you must create a Uniform Franchise Offering Circular under the Federal Trade Commission's (FTC) Franchise Rule. Fourteen states also require you to register your business. A business opportunity is regulated by 25 states and the FTC; you will be required to deliver a disclosure statement, register with state authorities and perhaps file a surety bond, depending on state law. Important tax consequences hinge on whether you have created an employment relationship or an independent contractor relationship.

If your goal is to establish a "straight" distributorship for the arm's-length distribution of product, meaning you'll exercise little control over the distributors after they buy your product, and you do not adopt features that trigger the application of these other laws, you'll need to ask your attorney to prepare a distribution agreement that spells out the key terms of the distributorship: the duration, the distributor's rights to use (or not use) your trademarks, product purchase terms, promises of territorial rights, and grounds for termination. It's not a complicated document to prepare, but your attorney needs to make sure your program will not run afoul of regulations.

Straight distributorships are subject to laws in a number of states that prohibit termination of the relationship unless there is good cause. "Good cause" is defined in a number of ways but generally requires that before you can cut off the distributorship, the licensee must have violated a material aspect of his or her contract with you. There are exceptions, but in general these laws mean you must remain committed to the terms of your contract. If you don't, and commit an "unlawful termination," the distributor has the right to sue you for damages.

Manufacturers large and small wrestle with these issues constantly. Your most important legal objective is to avoid surprises. With care and wise legal guidance, you will avoid being an "accidental" franchisor or business opportunity seller. If your distributorships naturally fall into one of those categories, then plan carefully and comply with the legal requirements. Good luck.

Q: I am looking to start a computer consulting business and would like to know the most important things needed to succeed.

Robert M. Howard

Sharon Hill, Pennsylvania

A: Ray Rauth, former president and chairman of the Independent Computer Consultants Association, started his own computer consulting firm, RR Enterprises, in 1983:

Over the past decade, I have known the owners of many small computer consulting firms. While most possess the necessary technical expertise, almost all lacked business sense and marketing savvy when they started their companies. Because of this, my response to your question will focus on what you'll need to know regarding the business and marketing aspects of the venture.

1. Know what you do and who you do it for. Your first task is to clearly define the services you will provide and the potential customers for those services. Some businesses are very specific; I remember one business owner who developed process control software for sawmills. Other businesses are more general, such as someone who provides both computer and consulting services to owners of small and home offices.

Once you have a solid idea of your services and your target market, write it down in a single, clear paragraph. This is known as your "elevator speech"--the way you'll first present your business to potential clients.

2. Determine your business needs. To choose the right legal structure, be it a sole proprietorship or a corporation, you will need to consider the specific needs of your business. Also, explore any insurance requirements and figure out how much cash you'll need for business and personal expenses. For answers to other business issues, you'll require the help of an accountant and a lawyer.

Remember, too, that federal and state laws require you to register your business with state, federal and local authorities. Do research to uncover any special circumstances relating to your niche. For example, the IRS watches independent computer contractors to ensure that those who claim contractor status are, in fact, contractors and not employees.

3. Build your marketing network. Most independent contractors, software developers and consultants depend on word-of-mouth to generate the bulk of their business. When you start, make sure everyone you know (friends, relatives, colleagues, business associates) is informed of your status as a consultant.

Next, get actively involved with a group such as a chamber of commerce, professional association or volunteer organization. Being involved means being active. Don't just show up at meetings--work on the committees, serve on the board and attend conferences. Once you get to know others in the organization, they will become valuable sources of referrals.

Finally, don't neglect interactive services and the Internet. Log on to the Comp. Consultant's Forum on CompuServe; it enables you to discuss business and technical problems with other consultants and also posts a section on available contracts.

4. Think client, not project. It is much easier to find one client and develop an ongoing business with that client for 10 years than to find the equivalent work on a project-by-project basis. To maintain your client base, provide the highest level of service possible.

5. Work to develop trust. This is probably the most vital determinant of your success. When you have earned the trust of your colleagues and clients, your relationships will become more valuable for everyone involved. To do this, ensure that you always understand and serve the interests of your clients. Develop clear and written specifications for all your projects. Always keep your word, and never, under any circumstances, do anything that will undermine your client's faith in you and your business.

Contact Sources

American Business Opportunity Institute Inc., 3 Bethesda Metro Ctr., #700, Bethesda, MD 20814;

RR Enterprises, (203) 454-7080, 102354,

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