First of all, we’re not talking about a distributor acting as an agent of the manufacturer who is paid a salary/commission and is not liable for unsold stock (among other things). Of course, if the distributor who is not an agent can get the goods only on consignment that would be preferable as he would only have to pay based only on actual sales and return unsold stock.
In any case, this discussion is about a stand-alone distributor who buys the goods at a discount, sells them at a profit and is liable for any problems relating to distribution (e.g., delay in delivery to customers). This is about a distributor who directly contracts with the consumer. The nature of his business is akin to that of a wholesaler.
So why become a distributor? Well, if you like a certain product which you can’t make and you think there’s a good market for it and you believe you can sell it and do good business as a result then you offer to become the product’s distributor in the market you’ve targeted.
And why would you want a distributor? Well, if you don’t have the funds for marketing and delivery to retailers or consumers, then you will need a distributor. It might be best for you to just stick to making your product and maintaining its quality without the headaches of dealing with direct costumers.
Now, let’s try to check out what your standard distributorship agreement might contain.
Types of distributorships
There are 2 basic types of distributorships: 1) exclusive (or sole), i.e., there is only 1 distributor within a given territory; and 2) non-exclusive i.e., there are several distributors (which may even include the manufacturer) within a given territory.
Exclusivity can work both ways. The manufacturer might prohibit the distributor from selling a competitor’s goods and/or from selling beyond the given territory.
You can fool around with the terms of exclusivity or non-exclusivity. You can even have partial or selective exclusivity, in terms of territory or goods.
Products, Supply and Delivery
A detailed description of the goods covered by the distributorship may avoid confusion between the parties in the future. Are there different types of products? Are they perishable? When do they expire? Are they fragile? How are they packaged? Can they be re-packaged? How should they be handled? Will the distributorship cover future products?
What’s the availability of the supply? What is the schedule for ordering? Will samples or demonstration models be provided for customer testing? Will a minimum order be required? What happens when minimum supply/order requirements are not met?
Do the goods need to be shipped to the distributor? How often? Who absorbs shipping costs and other risks during delivery to distributor? Upon delivery to distributor, what are the inspection procedures? What happens when there is a delivery shortage or there are defective or damaged products? When does ownership pass on to the distributor? When can orders be cancelled?
It’s best to clear up as many concerns as possible and as early as possible.
Precise terms and conditions of payment should be the aim. Are prices fixed or will they fluctuate depending on market conditions? Penalties in case of payment delays are advisable if you’re the manufacturer.
If you’re the distributor, you should ensure that, despite all possible payments, you will still make a profit. In any case, it is the essence in a distributorship agreement that distributor’s purchase price of the goods be much lower than market price.
Warranties and Liabilities
Product warranties are important to clarify in a distributorship agreement since the manufacturer has no contract with the customer, only the distributor does. Thus, warranties against defects, return of defective products, and even after-sales service (including provision for spare parts or other accessories) must be made clear, particularly the party who is responsible therefor.
The customer may look for relief in case of defective products so the parties need to assign liability beforehand.
Advertising and Marketing
The distributor would want to advertise himself as an authorized distributor, especially if he is an exclusive distributor. Consequently, he would want to use the trademarks/trade names (and relevant advertising material) in all activities to promote the sale of the products.
On the other hand, manufacturer might want to first approve all promotional material prior to their use and impose other restrictions on such use.
The parties should clarify who retains intellectual property rights. The manufacturer would wish to reserve the rights to his brand name and logos for example.
And, the manufacturer should set the standard by which the distributor should sell the goods or, better yet, set a minimum sales quota for a given period.
That’s all for now, folks. Remember these are just general thoughts on the distinguishing features of a distributorship agreement. If you want the real thing, though, you will need to hire lawyers like us =)