What is a Distribution Agreement? A Beginner's Guide to Everything You Should Know Before you Sign on the Line.
As a manufacturer, you pour blood sweat and tears into making a quality product that solves a real problem for your customers. If only they knew about it. The thing is, with so much time making your solution, you've got no time to get it to your market.
Let alone expanding the market to grow to the level you should be at by now. How do other manufacturers solve this problem? Often with a distribution contract.
They find someone who can get their product to market and grow that market. But you want to avoid some very real risks of using distributors by signing a distribution agreement. Let's look at exactly what a distribution agreement is, and how you can make your agreement watertight.
How Do Distributors Operate?
Distributors are the important players who get your product to the market. They might represent more than one company or product, and might be finding customers in more than one industry. They are useful for their knowledge of what will sell in the market, and for how to get to your customer base.
They usually work on a commission basis, though might also receive a flat contract rate besides to that. Putting them on a commission basis works well for everyone if you think about it. The more they sell, the more everyone makes - so you want to reward them for it!
How to Choose a Distributor
To find distributors, you can search online. Here's a couple of tricks for finding great distributors. Number one, find the best distributors for the competition and poach them.
They know the market and have the sort of relationships with buyers that you need. Another option is to head to a trade expo in your industry. You'll find streams of distributors roaming the aisles handing out cards, and some might even have a stall.
You'll need to decide whether you want a distributor selling many other brands, or one that works only with your brand. You also need to consider whether you want a single distributor, or several that compete for the market. The advantage of having several is that the competition can make them work harder for a sale.
And your customer base is regularly hearing pitches on the benefits of your company. If you sign sole distribution rights over to one distributor, and they're no good, what do you do? That's why you want to do the right checks and ask the right questions before signing anything.
What Questions Should I Ask a Potential Distributor?
Start with asking what they know about your product and what markets they think are most promising for it. If they haven't bothered to do their research ahead of the interview they're not going to be any good at getting you sales either.
Do you agree with their take on your product? How do you feel about their suggestions for market segments? It's important you feel they connect to the brand and that they share a vision for its future.
After all, they're going to be the face of your business. You also need to ask about their experience and results with similar technologies or similar customer groups. They should have no qualms about handing over contacts you can seek references from.
You want to settle on a strategic, charismatic distributor that knows the market. They should understand your customers and have the contacts to make permits easier. If you're seeking distributors in another country, look for trade development programs to assist you.
It's important overseas distributors know how to get your product to market in the target country. Do they have contacts in the relevant government agencies that approve import permits, and do they speak the local language?
What Is a Distribution Agreement?
A distribution agreement is a contract between a manufacturer or vendor and their distributor(s). It lays out the responsibilities of each. We've just learned all the different sorts of distribution relationship that exist.
You can see how important it is to be explicit about who should do what. As a manufacturer, it's especially important. You entrust the image of your company and the intellectual property information about how its made to your distributor.
But they're not your employee so you have limited control over their behavior. It's critical to have a watertight agreement spelling out exactly who can and will do what, where, for how long. And with what sort of financial payment.
That, in a nutshell, is what a distribution agreement is. So what happens if you don't have one. Or worse - you're locked into a bad one?
What Happens If I Don't Have One?
The risk of not having an agreement, or missing details, is the risk of you losing serious market share. Imagine a company with a new technology ready to shake up the market and make some serious financials. They link to a distributor for a 5-year exclusive contract.
But they don't tie the contract to performance or results. The distributor sits on their hands, doing very little to move your product. You wait for the end of the contract period. You end the distribution relationship and find an effective, well-connected distributor.
It's too late. During the five years your competitors made better, cheaper versions of your technology and now there's no market share left for you. A bad distribution agreement didn't cost you 5 years of sales: it cost the viability for your product, period.
And you thought your biggest headache was manufacturer accounting!
What Should It Have in It?
The agreement should mention which geographical regions you permit the distributor to sell in. It should spell out the length of the contract, and what sort of review process happens at the end of that period. If you're trying out a new distributor, consider only signing for an initial 6 month or 12 month period.
Link any extension of that arrangement to some clear performance results data.
Before you draw up the agreement, decide on whether you want a selective or intensive strategy. A selective strategy has a small group of distributors meeting your target markets.
This is common in B2B products and for exclusive, designer goods. An intensive strategy places the product in as many places and in front of as many faces as possible. The latter is best in the case of a new technology that you want to get as far and as wide as you can, and fast.
Make sure it looks at things like market rights, performance reporting, and geographical areas. Spell out trademark protection and licensing, and the terms on the conditions of sale and length of the contract. Be explicit about the terms under which the contract can be terminated.
Make sure it's all clearly spelled out in the agreement.
Who Draws It Up?
Due to the technical and legal nature of the agreement, have it drawn up by an attorney. It's important you be closely consulted during the process. Be present during contract negotiations.
Make sure you can agree with everything you're having the distributor sign on to. It's a good idea to take an experienced and trusted manufacturer along with you to the meeting. Learn from the mistakes by having them advise you.
So now you've got the detail right. But how long should the initial and following agreements be for? Let's take a look.
How Often Should You Review the Agreement?
Start out with short terms while testing your distributor(s) and checking their performance. That's especially important while testing a new market. If the product doesn't have a strong market there, you don't want to be stuck in a length exclusive distribution contract there.
Have your attorney advise you on the ideal length of time between reviews, and on the triggers for review. This is another point on which it'0s helpful to get advice from a more experienced industry mentor.
How to Get Started
Are you setting up sales in a new region? A good start is getting some independent advice there from local small business support organizations and an attorney. If you have industry contacts you trust, ask them if they can recommend distributors.
Start interviewing them about the experience and performance. You might ask the distributor what they think are the most important factors to have in your agreement. It's a great way of testing whether your values and goals are congruent.
Risks to Watch For
Distribution agreements exist because people got into big problems without them. Avoid losing rights to your product in certain regions, or having your products misrepresented and landing you in legal hot water. Avoid having someone steal your intellectual property and producing the same thing cheaper.
Get that agreement drawn up and signed. From there, it's all about making sure they're reporting results and you've got the small business accounting covered.
Now: Make Your Business Life Easier
A quality distribution agreement means avoiding unnecessary legal issues. There are many other ways to make your life easier as a small business owner and manufacturer. Like having professionals take care of your accounting and bookkeeping needs.
Would you like to learn more about full-service, audit-ready, cost-effective solutions? Learn more about Scrubbed's services for accounting, book-keeping, and tax here.