If you are a business that manufacturers products, you may consider using distributors to broaden your market and widen your sales opportunity. It is also possible to be a business that is looking to distribute goods on behalf of another business whether within the UK or globally.
Regardless on which scenario applies, you would either need a distribution agreement or would be asked to sign one. A distribution agreement is a type of contract typically used between a distributor and a supplier.
There are four main types of distribution agreements: exclusive, sole, non-exclusive, and selective. It is important for suppliers and distributors to recognise the advantages and disadvantages of each type to ensure the type of agreement drafted meets their needs and objectives.
Exclusive Distribution Agreements
Exclusive distribution agreements give distributors the sole rights to market and sell a supplier’s products within a specified area. This is more attractive for distributors, as exclusivity means no competition, full marketing and promotional support plus other assistance from the supplier.
However, from the supplier’s point of view, if a distributor fails to perform effectively or cannot fully exploit this exclusive opportunity, sales may not meet projected targets. A well-drafted distribution agreement should lay out the stipulations should targets not be met.
Sole Distribution Agreements
Under a sole distribution agreement, the supplier gives exclusive rights to their distributor in order to promote and distribute goods within a territory. However, they retain the right to still supply their goods directly to customers.
As above, there is risk involved. Should the distributors not perform successfully, reaching those targeted consumers might be more challenging for the supplier.
Non-Exclusive Distribution Agreements
Non-exclusive distribution agreements offer the supplier various advantages, such as allowing multiple distributors to be appointed within an agreed territory. This enables them to make direct sales and widen their reach with little concern over their performance.
Having too many distributors results in not having direct contact with your customers. It can place your company’s reputation in the hands of another. If the distributor offers customers poor customer service, your brand can suffer.
Selective Distribution Agreements
A selective distribution arrangement will typically be used by a supplier to maintain greater control over the resale of their products. Within this type of agreement, the supplier agrees to supply only those distributors who meet certain minimum criteria. There are potential risks that go along with these kinds of agreements, including increased costs, which leads not only to elevated expenses but also risks of conflicts between selected distributors, such as claims accusing them of breaching competition law.
Whilst the above are known to be the four main types of distribution agreements, it’s important to remember that depending on the relationship agreed, there are many variations to this agreement. Would your distributors white label the products or not? Purchase products for resale or would all orders go directly with the supplier? The commission paid would be dependent on how the sales are facilitated. Should exclusivity be offered, it would also help establish sales goals and expectations and what would if happen if those goals were not achieved. Clear provisions on intellectual property should also be considered since a lot of control can be passed to a distributor.
Regardless of which type of agreement you decide on, a well-drafted distribution agreement can help ensure that both parties understand their obligations to avoid misunderstandings during their relationship and avoid potential costly disputes.
At BEB, we can help you draft a distribution agreement tailored to your needs and circumstances. Get in touch with us today at 01604 217365 or info@bebconsultancy.co.uk.