What Is a Distribution Agreement?
When a company makes a product, it needs it to get to its customers. Sometimes, this means selling and marketing the product directly, but not all companies have the expertise or market presence to do this themselves, so they need to work with a distributor that has experience and a foothold in the target market. A distribution agreement defines the terms of an arrangement between these two parties, allowing the distributor to sell and market the products of the supplier.
A distribution agreement is a contract between a manufacturer or wholesaler and a distributor who sells and markets the products.
A distribution agreement is a legally binding agreement between an entity that supplies goods and one that distributes goods. The supplier in this case can be either a manufacturer or another distributor that is reselling another supplier's goods. The distributor is a company that plans to market and sell the products, whether to the public or to other companies.
The distribution contract defines the terms of the agreement, including the cost of the goods or the commission rate, the length of the contract, where the distributor may operate and other important details.
Suppliers and distributors can always come up with an informal distribution arrangement. In fact, many do, but these verbal agreements often result in misunderstandings that can be very problematic for one or both companies.
By creating and negotiating a contract that spells out all the specific terms of the deal, the companies are able to ensure that they are both clear on all aspects of the arrangement so they both live up to their end of the deal. When one party fails to live up to the agreement terms, a formal contract also provides legal protections and remedies for the wronged party.
It's also important to ensure that these contracts are personalized for each deal. This is not only true because every deal will be subject to different terms but also because the purpose of distribution agreements can vary drastically. Some suppliers seek out distributors to help get their products to their desired markets, while others are focused more on the distributor's marketing expertise. The details of these deals will vary drastically based on the intent of these deals as well as the specifically negotiated terms.
One of the most important details of a distribution agreement is whether or not it is exclusive. An exclusive agreement grants the distributor exclusive rights to sell a particular item, to operate in a given territory or to use a specific sales channel. For example, a grocery store may be given the right to be the only brick-and-mortar that sells a specific type of cracker, but the product can still be sold online. A supplier may give a distributor exclusive rights to be the only distributor in Los Angeles to carry its products, while other distributors can carry the product elsewhere.
Obviously, the distributor benefits from exclusivity agreements, but there is a trade off for exclusivity, and that is that suppliers will usually define some sort of minimum performance obligations to which the distributor must agree. Failure to meet these obligations will result in financial penalties, a reduced commission rate or loss of exclusivity rights.
Nonexclusive agreements allow the supplier to contract with as many distributors as it chooses (it can even distribute the products itself), even in the same market areas. A selective strategy means making agreements with a small number of distributors to ensure all target markets are reached, whereas an intensive strategy involves trying to get the product to as many buyers as possible by working with a wide array of distributors, although this can cause competition between distributors. Consumer-oriented products often use intensive strategies, which is why you can find your choice of most Coca-Cola or Pepsi products at stores across the United States, whereas selective strategies are often used for products made for commercial markets, such as computer chips or construction equipment.
There are many factors a distribution agreement contract may include, but at the very least, they must specify the length of time the contract will be valid, details regarding the supply of the product and the sales territories covered by the agreement. Specifying all details about the supply of the product is particularly important, and these need to be discussed in detail either in the contract or in an annex. This section should cover order placement, payment, delivery, returns, inspection requirements, transfer of risk, transfer of title and all other relevant details.
Like all contracts, these agreements should be legally binding, and it is important to make sure they follow the law in order to ensure their validity, which is why distribution agreements should always be reviewed by an attorney before being signed by either party.
There are many other additional details that may be covered by the contract as well. These may include:
- Payment Details: One of the most important details in a distribution agreement is how the distributor will earn money, whether it's through commission related to selling the products or profits left after buying the products wholesale and then selling them for a profit. However the contract is set up, the contract should also detail what will happen with unpurchased inventory and if there are any minimum or maximum prices for which the distributor must sell the products.
- Marketing Rights: The responsibility for marketing the product may be left to the distributor, the supplier or both. If the distributor markets the product, then the supplier may detail what assets it may use to promote the product, what activities it performs for the purpose of advertisement and what guidelines it must observe regarding the supplier's branding.
- Reporting Obligations: The supplier may request reporting regarding sales, inventory, marketing or other details of the agreement that shall be generated by the distributor at intervals defined in the agreement. This is particularly important in cases where the distributor is paid a commission or when the supplier must buy back unsold inventory.
- Forecasts: Just as the distributor may be expected to meet minimum sales requirements, the supplier may be required to meet minimum supply requirements. Sometimes, the distributor will also be required to purchase a minimum amount of the product. These minimums will be based on forecasts that will be put out periodically throughout the length of the agreement at intervals defined in the contract.
- Consumer Training Obligations: Many tech products include details regarding the level of training and support the supplier will provide to the distributor and who is responsible for providing training and support for consumers.
- Competition: These clauses are optional and define restrictions banning the distributor from selling similar products from competing suppliers, from selling similar items from the same supplier or from competing with the supplier itself during or after the agreement period. These usually only apply to fairly unique products and not those where there are dozens or more varieties on the market.
- Trademark Licensing: It's important to detail the rights of the distributor regarding the use of intellectual property, including brand names and trademarks.
- Termination Circumstances: Circumstances under which the agreement can be terminated by either party and the consequences of such a termination must also be spelled out, as it is always possible that one party or the other will need to void the agreement at some point.