4 Reasons Why Suppliers Need a Distribution Agreement (plus a Lawyer-Drafted Template)
As a business owner, you will have heard of, or may have already used a distributor to market and distribute your products either wholesale or retail. Appointing a distributor or reseller is an easy way of getting your products in front of new customers with minimal cost and effort.
Entering into a distribution agreement will help to ensure your business relationship runs smoothly. It’s also an effective way of protecting your business if your distributor doesn’t live up to expectations.
What is a distribution agreement?
A distribution agreement is often used by suppliers or manufacturers to engage with a distributor to sell its products in new territories. It’s a contract that sets out the terms and conditions between a supplier and distributor to resell products at wholesale or retail level.
The distributor will first buy the products from the supplier and then resell the products to the distributor’s own customers in a particular geographical area.
Here are some examples of a distribution arrangement:
A German car company (the supplier) selling cars to Finnish car dealer (the distributor) who will resell the cars in Finland.
An English importing company (the distributor) purchasing toys from a toy manufacturer in China (the supplier) to resell to wholesale retailers in the UK.
What are the benefits of entering into a distribution agreement?
1. Control over the distribution of your products
When appointing a distributor, you will need to decide whether the distributor will have sole rights, exclusive rights or non-exclusive rights. Depending on the type of rights given, the supplier can choose how much or how little exclusivity the distributor has in the agreed market.
What are sole rights? Only the distributor will have the right to distribute in the agreed location, however, the supplier/manufacturer will also have the rights. Depending on the circumstances, this is usually a popular choice for both suppliers and distributors; as suppliers will only need to worry about supplying to one distributor, and distributors won't need to be concerned about other competitors in the market.
What are exclusive rights? Only the distributor will have the right to distribute in the agreed location. Distributors will often push for exclusive rights under a distribution agreement if they have the bargaining power to do so, as exclusivity in the market gives the distributor an edge against its competitors. It also gives distributors a chance to sell the products at a profitable price without worrying about another company undercutting this price with customers.
What are non-exclusive rights? The distributor has the right to resell, however, the supplier has full rights to still appoint other distributors in the agreed location to also resell products. For this reason, non-exclusive rights are a favourable arrangement for suppliers or manufacturers, as they have the power to appoint as many distributors to sell the products in a territory as they wish.
2. Expand into new markets
Partnering with a distributor can help increase sales and build a supplier’s customer base in new territories and larger markets. Distributors tend to know their territory thoroughly and will already have access to established sales channels to resell the products. A distributor can enhance a supplier’s reach to businesses or consumers without the need for local market knowledge or a physical presence in the territory.
3. Protect your intellectual property (IP) and confidential information
A company's IP is often one of its most valuable assets. That's why it's so important to make it very clear in the distribution agreement that each party will continue to own their existing IP. What we mean by this is, you wouldn't want to accidentally agree to assign all of your IP to the other party. This is the kind of risk you take when using a poorly drafted contract template you found 12 pages deep into a Google search (yikes!). It should also set out whether a party can use the other’s IP (such as trade marks) to market and sell the products. The distribution agreement can also clarify which party will own any new IP that is created in connection with the products after the distributor has purchased them for resale.
4. Increase sales while reducing costs
Engaging carefully selected distributors can be a very useful tool to help a business sell its products and increase sales, whilst also enabling a supplier to concentrate on manufacturing and supplying products in its own territory.
If the supplier has the bargaining power to do so, it can require the distributor to order a minimum purchase amount. This means that the distributor will have to buy at least the agreed amount of products from the supplier in a certain timeframe. If the distributor has agreed to be contractually obligated to buy the minimum purchase amount in the distribution agreement, this ensures the supplier will be paid for these products as agreed. If this sounds like an attractive arrangement to you, Docue’s distribution agreement template gives you the option to include a minimum purchase amount.
How do I create a distribution agreement using Docue?
It’s easy, first you add in the parties' details and then answer a series of questions. Then Docue will automatically build your distribution agreement. It really is that simple! Our dynamic platform allows you to create contract templates in minutes at a fraction of the cost that a law firm would charge. Try it now:
You can find Docue's distribution agreement template here.
Alternatively, if you’re looking for a reseller agreement, take a look at our reseller agreement template.
But I’m not a lawyer - how will I know what certain clauses in the contract mean?
That’s the beauty of Docue’s ultra-modern contract-building technology - you don’t need to wear a suit and tie or go to law school! Docue has handy information boxes that will guide you through the process step-by-step. As you answer each question, if you’re unsure or you get stuck, you can hover over the information boxes to give you a helping hand.
Can the distribution agreement be signed electronically?
Yes - once you have finished creating the agreement, it can be sent directly to the other party via Docue for e-signing. After all the parties have signed the distribution agreement, you can also safely store the contract in Docue’s storage vault and set helpful reminders for any upcoming deadlines.
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Docue Legal Team