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When a business that creates its own products wants to accelerate its growth but can't attract new customers fast enough, it can start selling to distributors. Distributors purchase large quantities of products from a supplier to on-sell to their own customers to make a profit. A distribution agreement makes this possible.
What's in this guide?
- What is a distribution agreement?
- When should I use a distribution agreement?
- Distribution agreement vs agency agreement
- What does a distribution agreement include and not include?
- How effective is a distribution agreement?
- Do I need a lawyer for a distribution agreement?
- Get access to customisable distribution agreement templates online
- How do I write a distribution agreement?
- Where to get free legal documents and templates like a distribution agreement template
What is a distribution agreement?
A distribution agreement is a legal contract that grants rights to a distributor to sell the products of a supplier. This arrangement is known as a distributorship.
The purpose of a distributorship is for a distributor to sell on products purchased from a supplier to its own customers under its own branding to make a profit (arbitrage).
A distribution agreement enables a supplier to sell a higher volume of product and a distributor to increase its product selection without doing any R&D or manufacturing.
Download this template at Lawpath
When should I use a distribution agreement?
A distributorship exposes a supplier's products to the customer base of a distributor.
A supplier should consider using a distribution agreement when it wants to sell a higher volume of its products in addition to the volume it is able to sell to its existing customers. In this way, a distribution agreement enables a supplier to earn a larger profit overall.
A supplier might not earn as much profit per unit sold to a distributor. However, sales to a distributor are in addition to sales made by the supplier directly to its other customers. A distributorship enables a supplier to earn a larger total profit.
Distribution agreement vs agency agreement
Like a distribution agreement, an agency agreement grants an agent the rights to sell a supplier's products.
A distribution agreement is different from an agency agreement in that an agent sells a supplier's products on the supplier's behalf, under the supplier's brand.
Additionally, the agent doesn't buy the products from the supplier. The agent receives a commission for each unit of product that it sells.
Conversely, a distributor purchases products from a supplier to sell under its own brand. The distributor doesn't sell the products on behalf of the supplier. The supplier makes its profit when it sells to the distributor, and the distributor hopes to make a profit when it sells to its customers.
What does a distribution agreement include and not include?
The contents of a distribution agreement vary widely depending on the products in question. However, all distribution agreements have some standard details.
What is included in a distribution agreement?
- Details of the supplier and distributor
- Details of the product to be distributed
- Duties of the supplier (quality and quantity minimums) and distributor (order quantity minimums)
- Territories in which the distributor can sell the supplier's product
- How and when payment will be made by the distributor for purchases of a product
- Duration of the distribution agreement
- How the distribution agreement can be terminated, renewed, or extended
- Whether the distributor will pay a fee to the supplier to initiate the distributorship
- Whether the distributor will have exclusive rights to sell the supplier's product in a specific territory
- Penalties for breaching the terms of the distribution agreement
What not to include in a distribution agreement
- Details of commissions for sales
- Locked-in product purchase prices without a framework for price renegotiation
How effective is a distribution agreement?
A distribution agreement can contain penalties for either party not adhering to the terms of the agreement which can be legally enforced.
A distribution agreement can also grant security to the supplier for payment for orders placed by the distributor. The supplier can gain ownership of assets owned by the distributor in the event of the distributor not paying.
Do I need a lawyer for a distribution agreement?
You can write a distribution agreement yourself. However, the agreement must be fair to both the supplier and distributor to foster a long-term, mutually beneficial business relationship. The goal of a distributorship is a long-term collaboration.
A distributorship will eventually fail if the agreement puts one party in financial difficulty. Therefore, consider hiring a legal professional to help you write a distribution agreement to ensure that it includes clauses that protect both parties from financial difficulty as a result of the agreement.
Get access to customisable distribution agreement templates online
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How do I write a distribution agreement?
Every distribution agreement includes the following.
- The sign-on fee. The amount of money that the distributor will pay to the supplier to initiate the distributorship.
- The duties of each party. The obligations that the distributor and supplier will have to one another, and what happens if either party fails to meet those obligations.
- The term of the agreement. The start date of the distributorship, and optionally an end date. With an end date, the agreement should include details of how to renew or extend. Without an end date, the distribution agreement can be ongoing and should include details of how to terminate.
- The territories to sell in and exclusivity. The territories in which the distributor has the right to sell the supplier's products. A supplier may want to spread its risk by working with different distributors in different territories. A distributor may want to increase its market share by getting exclusive rights to sell a supplier's products in a specific territory.
- IP and marketing rights. Details of whether the distributor can use intellectual property owned by the supplier, such as branding materials, to market the product and make sales.
- Details of non-compete. Details of whether the distributor will be allowed to compete with the supplier's offering during or after the termination of the distribution agreement.
- Order and payment security. Details of whether the supplier will take ownership of any of the distributor's assets if the distributor can't or won't place the required minimum orders, or pay for fulfilled orders.
Where to get free legal documents and templates like a distribution agreement template
These are some places to get a distribution agreement template to get you started before consulting a legal professional.
- Lawpath. Lawpath offers many legal document templates. Document samples are available for free. Full customisable documents are available after signing up for an account.
- LegalVision. LegalVision is an Australian commercial law firm that offers a basic distribution agreement template for free. LegalVision can write a bespoke distribution agreement for you upon request.
- Net Lawman. Net Lawman offers customisable distribution agreements of varying types, such as from the perspective of a supplier to have distributors sign, from the perspective of a distributor to have a supplier sign, and for distributorships with high-value brands. Net Lawman charges between $69 and $139 per template, depending on the complexity of the agreement.
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