Distribution Agreements

What is a Distribution Agreement?

Simply put, a distribution agreement is a contract between a supplier (manufacturer or brand owner) and a distributor. It outlines the terms under which the distributor will promote, sell, and distribute the supplier's products within a specific territory.

Key Terms to Consider with distribution agreements

• Exclusivity - does the agreement grant the distributor exclusive rights to sell the goods within a defined territory? Or is it non-exclusive, allowing competition from other distributors or even the supplier itself?

• Minimum Order Quantities - are there minimum purchase requirements for the distributor to maintain? This ensures predictable revenue for the supplier while motivating the distributor to actively sell.

• Pricing and Margins - how are prices and profit margins determined? Fixed prices might provide stability, while flexible pricing can offer negotiation room and market adaptability.

• Marketing and Sales  - who is responsible for marketing and sales? The agreement should define shared or individual responsibilities, ensuring coordinated efforts towards market penetration.

• Intellectual Property Rights - how are intellectual property rights, such as trademarks and patents, protected? The agreement should clearly define ownership and usage rights.

• Termination Clauses - when and how can the agreement be terminated? Clear exit strategies protect both parties and prevent future disputes.

Distributor or Agent relationship?

While distribution and agency agreements share some similarities, they have distinct legal implications.

The key difference is that a distributor buys the goods from the supplier and resells them at their own risk, taking ownership and responsibility for sales, marketing, and distribution. An agent, on the other hand, negotiates sales on behalf of the supplier without taking ownership of the goods. They act as an intermediary, receiving a commission on successful sales.

There are several advantages to having a distributor, especially for manufacturers and brands trying to reach a wider market :-

• Reach - distributors have established networks and relationships within specific regions or industries, allowing you to access new markets and customers you might not be able to reach on your own.

• Expertise - distributors have local knowledge and market insights, guiding you on pricing strategies, regulations, and cultural nuances for effective product positioning.

• Logistics – the distributor deals with product storage, transportation, and delivery.

• Larger order volumes – due to the level of commitment on their part, distributors will often target larger order volumes.

• Reduced Costs and Risks – no need to invest in your own sales force, marketing initiatives, or logistics infrastructure, reducing upfront costs and ongoing overheads. Risk is reduced in terms of unsold products, as distributors buy your products upfront and assume the responsibility for selling them.

• Faster Market Entry - leveraging a distributor's existing network can significantly speed up your entry into a new market compared to building your own infrastructure.

If you need solicitors to draft a distributor agreement, please do get in touch. We also review agreements and advise on legal disputes relating to distributor contracts.