What Are the Main Benefits of Having a Distribution Agreement?

As your business grows, you may want to identify new distribution channels and expand your sales locally or even into new countries. In this situation, many business owners consider agreeing on a distribution agreement with another company. This article will explore the advantages and disadvantages of distribution agreements so you can make the best choice for your business.

What is a Distribution Agreement?

Distribution arrangements usually involve a supplier or manufacturer offering goods for another company (the ‘distributor’) to sell for them. There are three common forms of agreements for distributors. These include:

• exclusive distribution agreements, which provide the exclusive right to sell goods within a defined territory (for example, within the UK);
• sole distribution agreements, which provide the exclusive right to sell goods within a territory excluding the supplier or manufacturer themselves (for example, a company can distribute to a supermarket but also sell the product directly on their website); and
• non-exclusive distribution agreements, which provide the ability to sell the goods within a territory without exclusivity (for example, a bike company may wish their items to appear on the shelves of multiple retailers, not just one).

Key Benefits of a Distribution Agreement

There are some key benefits associated with using a distribution agreement.

1. Knowledge and Contacts

The distributor may have better knowledge and contacts within a particular market than your company. For example, let us say that you manufacture PC monitors and wish to expand into France. Your company may save time and money using a distributor. Rather than establishing a base in France, you can allow the distributor to handle marketing, post-sale support and repair services.

As such, distribution agreements are a relatively low-risk way of entering new markets and territories. If your company achieves good sales in that country, your organisation might consider selling goods there directly in the future.

2. Distributor Assumes Risk

A degree of risk passes to the distributor under a distribution agreement. For example, say your distributor purchases 300 printers from your company but can only sell 150. In this instance, the distributor will still own all 300 and cannot return them to your company. Therefore, the distributor is motivated to sell its stock of goods and return with decent sales figures. It also provides your company with some financial certainty regardless of end sales.

Disadvantages of a Distribution Agreement

There are some potential disadvantages, though they are mostly minor in comparison.

Most of these disadvantages will arise due to poorly drafted contracts. Therefore, it is wise to pay attention to the wording of these types of written agreements.

Key Takeaways

Distributor agreements can be an effective means of selling your products. Whether the distributor helps sell goods on your behalf or expands into new territory, they can bring obvious benefits and help increase sales. Like all contract forms, generic templates are often unsuitable. Accordingly, many business owners obtain expert legal advice in drafting, reviewing and agreeing to distribution agreements. This can help ensure that the terms are reasonable and the wording protects your company if the distributor acts poorly or your business wishes to sell products in that market in the future.

If you need help with a distribution agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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