What Is a Distribution Agreement?

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Electronic devices on display in a retail store.
Electronic devices on display in a retail store. (Image: James Alcock/Getty Images News/Getty Images)

A company can choose between hiring its own sales people to distribute its products or it can use distributors to provide the same function. Most small businesses use distributors because it is less expensive, facilitates cash flow and because distributors have more knowledge and experience in the market area. The distribution agreement is the contract between a company in need of having its products distributed and the distributor that specializes in providing that function.

Distribution Agreements

The distribution agreement is a contractual document between a supplier and the distributor that defines the requirements and terms of marketing an item or a product. This type of document works best for companies with limited sales forces because it eliminates the need to hire additional employees. Once a company enters into a distribution agreement, and depending upon the terms of the agreement as they vary by industry, the distributor assumes the risk for selling the product to retailers or to final end-users. The distributor can also provide a range of after-sale services, such as technical support, repairs and servicing that would be costly -- if not impractical -- to do in-house.

Non-Exclusive Distribution Agreements

The non-exclusive distribution agreement lets the company appoint multiple distributors within a geographic territory by market segmentation or by whatever distribution criteria deemed relevant. Typically, distributors bound to non-exclusive distributor agreements can carry products from competing companies. Non-exclusive agreements tend to be preferred by companies and opposed by distributors because companies want to evaluate distributor performance before committing to exclusivity. Distributors counter with the claim that territory development is too costly without an exclusive agreement. Both sides have valid concerns, which are usually worked out through compromise, such as meeting sales objectives prior to considering additional distributors.

Exclusive Distribution Agreements

In the exclusive distributorship agreement, the company agrees not to distribute its product through any of the distributor’s competitors within a defined geographic territory. The agreement frequently stipulates that the distributor will not handle products of the company’s competitors as well. Exclusive agreements are typically found in high-tech industries that involve sophisticated products requiring considerable product knowledge, expertise and extensive market development costs, such as costly medical equipment. Exclusive agreements are also common in luxury products, such as high-end automobiles. Since the exclusive agreement constitutes a marriage between the two parties during the length of the agreement, companies contemplating such an agreement must complete the required due diligence before signing the contract.

Distribution Agreement Mistakes

The task of writing a distribution agreement can be challenging. The inexperienced person might be unaware of mistakes written into the agreement until it is too late. The best and easiest way to avoid costly mistakes is to obtain a copy of a distribution agreement commonly used within the industry. A good source for an industry-specific standard agreement is the industry trade association or the industry distributor association. The standard agreement should serve as a point of departure to adjust and modify according to the company’s and the distributor’s or both parties' requirements.

Legal Contract

Distribution agreements are legal contracts drawn up by the supplying company's contract manager or legal department. The terms of the agreement may include specific marketing and advertising requirements, base sale prices, discounts, logo usage and more -- as well as the expectations of both parties. Most legal distribution agreements also include a termination for cause or convenience section, which allows both parties to back out of the agreement if something arises beyond their control. Inexperienced suppliers or distributors may attempt to limit the termination section, but experienced professionals understand the changes that can occur in business.

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