Key Points for suppliers
- Get to know your distributor – even the strongest legal contract will not prevent unethical behaviour
- Carry out thorough due diligence
- Get guarantees
- Understand the distributor’s business
Contract content
Size doesn’t matter – an effective distribution agreement can be just a few pages in length providing it addresses all the key issues. Ask for specific information from your distributor about marketing, resources to handle your product and after sales service. Once you have learned all you can about what your distributor proposes to do, give the information to your lawyer to be included as obligations in the distribution agreement.
The essential ingredients of distribution agreements are:
- Territory – specify the distributor’s territory and address the issue of sub-distributors and assignments, which are generally not in the supplier’s best interests
- Excusive or non-exclusive – specify whether the distributor has exclusive or non-exclusive rights and the territory they cover
- Performance – set performance measures that the distributor must achieve after giving them a reasonable period to get the distribution programme up and running
- Competition – possible restrictions on the distributor carrying competitive products
- Price and payment terms – attach a price schedule to the agreement and specify the currency and payment terms
- Shipping terms – the exporter is usually responsible for getting the goods to the distributor with risk of loss passing after delivery
- Ordering – Attach an order form to the agreement and stipulate minimum order size
- Brand Ownership – market under your own brand rather than the distributor’s brand
- Promotion – specify the distributor’s spend on advertising and promotion
- Responsibilities and Obligations – specify obligations around installation and training, technical support and after sales service
- Term of the Distribution Agreement
Managing the relationship
Regular communication is important to help the distributor understand your expectations and help you achieve them. Do not rely on the legal contract – it sets a basic outline, but it is up the parties to work out the operational details.
Distributors have particular expertise and know their business. The right way of doing business with a distributor is the distributor’s way.
Be realistic. Distributors may not share your passion or have your product knowledge and they will be focused on the products that are easiest to sell or earn the best margin.
Remember that a distribution agreement is usually an interim relationship. If your business model is sound, you will soon want to establish your own, direct presence in the market.
