Understanding Dealer Franchise Laws

dealer franchise laws

You follow dealer franchise laws because you have to, but why do they exist in the first place?

Do a Google search for “dealer franchise laws” and the top results certainly tell a story of confusion, pessimism, and discussion about whether or not the traditional automobile franchise system has run out of gas. As someone who works in an auto dealership, this talk obviously affects you and you may even field questions on the topic from interested consumers from time to time.

But do you know why dealer franchise laws are in place? If not, you may want to take a moment to learn a bit so you can understand why dealerships operate the way they do, and how things may change in the future.

dealer franchise laws

Why do dealer franchise laws exist?

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.

There’s a lot at stake when it comes to the manufacturing, selling, operating, repairing, and financing of vehicles, so laws play a big part in keeping everyone safe and things on the up and up. 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. Consumers

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. There’s also a convenience factor when it comes to servicing vehicles because dealerships have the ability to handle recalls or repairs under warranty.

2. Manufacturers

Instead of investing millions of dollars in building a dealership from the ground up, manufacturers can sell their vehicles through franchisees that take on the bulk of the financial burden. They’re often given top-of-the-line distribution channels for selling their vehicles.

3. Local community

Dealerships provide excellent job opportunities for the communities in which they operate. 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.

dealer franchise laws

The future of dealer franchise laws

It’s been illegal for manufacturers to sell directly to consumers, but that could change in the future as some brands are trying to rethink the system. One of the biggest game-changers in the industry right now is Tesla, which is trying desperately to get around state laws and open direct-to-consumer storefronts. Some states have blocked them from selling their vehicles, but allow the company to open a showroom where consumers can learn more about their cars.

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.

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.

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.

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Patrick H.
Patrick H.