Using a distributor can be an effective way to grow your business, reach new markets or launch new products. However, like any business relationship, you need to manage it carefully to reap the benefits and avoid potential pitfalls
What a distributor does
A distributor buys your products and often those of other non-competing businesses to sell them on to their own customers.
Appointing a distributor
Distributors can help you to reach markets you could not otherwise target, or not target as economically - for example, if you are a new business or venturing into a new, unknown market.
Businesses often appoint distributors in overseas markets because a local distributor has existing local customers, contacts and relationships, and better understands the local business culture and practices.
You must be sure the distributor has sufficient market reputation and financial strength to achieve your aims.
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Managing the distributor relationship
You must both have a clear understanding of each other's expectations. A written contract is vital. Take legal advice to check that the agreement will achieve your aims, and that you will not suffer any unexpected obligations or restrictions.
Put the right systems in place to help you fulfil your responsibilities. Practical problems, for example, with payments or delivery of stock, can put a serious strain on the relationship and could make you liable for any damage suffered by the distributor.
Communicate regularly. This helps you to identify potential problems at an early stage, making it more likely that you will be able to resolve them before the consequences become serious.
Key elements of a distribution agreement
- territory covered, and whether they have exclusive rights to that territory
- products to which the agreement relates
- any restrictions on their sale of competing products
- what your responsibilities are, in terms of supplying your product (normally, you would be expected to make reasonable efforts to continue to supply it), keeping it competitive and fulfilling orders
- what your distributor's responsibilities are in terms of promoting your product and making sales
- rights and restrictions in relation to your intellectual property (ie the distributor's rights to use your name, brand and logo, etc)
- terms and conditions of sale, responsibilities for transport, delivery and insurance, and when ownership and risk in relation to products will pass from you to the distributor
- restrictions on disclosure of confidential information
- your rights to discontinue the products being distributed (you normally have this right)
- what will happen if you or they wish to terminate the relationship
The agreement needs to be carefully drafted to take into account what you are trying to achieve and the implications of competition law and other regulations, breach of which can result in severe penalties. These vary depending on the territory covered by the agreement and the choice of law in the agreement.
Distributors and exclusivity
You can give a distributor exclusive rights to distribute your goods in a particular territory, limit the number of distributors or require distributors to meet particular qualifying criteria. However, if you do, competition law probably means you can't stop the distributor from selling competing products too. Take advice.
If the distributor wants exclusive rights to a territory, you might also aim to negotiate a minimum sales target.
Distributors selling competing products
You can stop a distributor selling competing products, unless:
- you have given the distributor exclusive rights to one territory, limited the number of distributors or you require your distributors to meet particular qualifying criteria
- you have a market share of over 30%
If you do, the restriction must not last more than five years.
Distributors' sales outside their territories
Unless you have a market share of more than 30%, your agreement can prevent the distributor from actively selling outside their territory, or to customers who have been allocated to another distributor. If you have more than 30% market share, take advice. Competition law will apply.
However, the agreement cannot restrict passive sales - for example, if a customer approaches the distributor, or if the distributor sells outside the territory through their website.
You cannot control the prices the distributor charges for your products, because that would breach competition law.
Distributor promotion and sales
You can control promotion and sales in the agreement, such as the adverts and point of sale materials used. It could require the distributor to run particular marketing campaigns or spend a specified amount of money on them. The agreement could also require the distributor to maintain an adequate stock of your products.
The distributor might negotiate for you to provide them with marketing support or a contribution to their marketing costs.
Protecting your intellectual property and confidential information
Your agreement should spell out what use the distributor is allowed to make of your trade marks and other intellectual property. For example, it might ban the distributor from altering your product packaging.
Intellectual property can be a complex area. Unless your agreement is carefully drafted, there can be unintended consequences - for example, the distributor may become entitled to some of the value of the intellectual property.
Confidential information can be protected with suitable terms in the agreement. These need to include how confidential information will be protected after the distribution relationship is terminated.
Product liability and distributors
You are liable for your product in law, and the distributor may want to negotiate an indemnity where you take responsibility for any claims made against the distributor for faulty products. Terms limiting your liability need to be carefully drafted to be effective.
Breaches of the distribution agreement
If the distributor breaches the agreement and damages your business, you may have a claim against them for breach of contract and the losses you have suffered as a result. For example, if the distributor fails to meet an agreed minimum sales target, or abuses your intellectual property.
Otherwise, you will have the same rights as you would with any unrelated individual or business.
Terminating the distributorship
Arrangements for terminating the agreement - including which terms (eg confidentiality) will continue after termination - should be clearly stated in the written agreement.
The agreement should also deal with how the distributor's remaining stock of your product will be handled after termination: for example, whether they will be allowed to continue selling it for a specified time, or whether you must buy it back from them.
Always take legal advice if in doubt.