Orr Litchfield

Solicitors and Business Lawyers

Appointing a distributor - What type of distribution agreement is right for your business?

Overview of distribution arrangements

In previous articles we explored the primary business methods used by companies to enter new markets and identified the key issues for companies to consider when appointing a distributor.

Once you have made the decision to appoint a distributor, you should spend time fine-tuning your objectives and goals for the development of your business in the prospective new markets. This should include the allocation of responsibility for administrative, operational, financial and other matters. In particular, you need to decide which type of distribution agreement is right for you and your business. There are four main categories of distribution arrangement – exclusive distribution, sole distribution, non-exclusive distribution and selective distribution. We have summarised each type of distribution arrangement below.

Main types of distribution arrangements

There are many similarities between each of the 4 main categories of distribution arrangement. In general terms, the greater the level of exclusivity for a distributor and the greater the size or importance of the relevant market, the greater the level of obligations imposed on the distributor by the supplier. However, you should bear in mind that whilst many issues will be relevant to all or the majority of businesses engaging in distribution arrangements (whether as manufacturers, suppliers or master distributors), there is no “one size fits all”. Every business is unique, every business owner is unique, the majority of products are unique in one way or another and different markets may have different laws relating to distribution agreements (and the products to which they relate) and will almost certainly have different commercial customs, practices and product regulations.

1. Exclusive distribution agreements

An exclusive distribution arrangement is one in which a supplier agrees to sell specified products (or classes of products) to a single distributor within a designated territory. As part of the arrangement, the supplier also agrees not to appoint other distributors or sell the products itself directly to other customers within the territory.

Exclusive distribution arrangements are often used where a supplier wishes to start selling its products in a new territory in relation to which it has little or no local knowledge. The supplier appoints a distributor with local knowledge and usually an established business within the territory. The distributor agrees to take on the high risk and costs associated with promoting a new product in return for the right to be the exclusive distributor in the territory. As such, it will be the only direct beneficiary of its sales and promotion efforts. The supplier has the advantage of knowing that the distributor will be motivated to sell its products, particularly if the distributor is obligated to purchase a minimum level of products from the supplier and is prohibited or restricted from selling competing products. The supplier often also imposes minimum purchase, sales and other targets with the threat of withdrawing the exclusivity (or, sometimes, terminating the arrangement) if such targets are not achieved by the distributor.

2. Sole distribution agreements

A sole distribution arrangement is one in which a supplier agrees to sell specified products (or classes of products) to a single distributor within a designated territory. However, as part of the arrangement, the supplier reserves the right to sell or supply the products directly to customers within the territory. The meaning of the term “sole distributor” should always be clarified within the agreement so as to avoid confusion with the term “exclusive distributor”.

Sole distribution arrangements are often used where a supplier already has some customers in a territory (for example, via direct sales or through distribution or other operations in nearby territories) but has an insufficient customer base and insufficient local knowledge to establish its own local business. Sole distribution has the twin advantages of near exclusive distribution for the distributor within the territory, and the freedom for the supplier to promote, sell and supply its own products (to existing and/or new customers) in the same territory. Sole distribution agreements usually contain similar provisions and restrictions to those in an exclusive arrangement. However, typically, the greater the ability of the supplier to compete with the sole distributor in the territory, the lower the level of obligations imposed on the sole distributor. Sole distribution agreements usually provide the supplier with more control in relation to the sale of its products in the relevant territory, if the distributor fails to achieve the required minimum purchase, sales or other targets.

3. Non-exclusive distribution agreements

A non-exclusive distribution arrangement is one in which a supplier agrees to sell specified products (or classes of products) to a distributor within a designated territory. However, as part of the arrangement, the supplier reserves the right to sell or supply the products directly to customers within the territory itself or indirectly via other distributors within the territory. Such an arrangement provides the supplier with a significant level of control in relation to its products within the territory and means that each non-exclusive distributor will (or may) have to compete with the supplier and other distributors in terms of both pricing and promotion of the product. Consequently, the terms of the non-exclusive distribution agreement are usually far less onerous on the distributor than those within an exclusive or sole distribution agreement.

4. Selective distribution agreements

A selective distribution arrangement is one in which a supplier agrees to sell specified products (or classes of products) only to distributors within a designated territory who meet specified criteria. As part of the arrangement, distributors usually agree only to sell on the products to end users or to other approved distributors and the supplier may reserve the right to sell or supply the products directly to customers within the territory itself. Accordingly, the supplier retains tight control over the number and nature of the entities selling or supplying its products in the territory and the manner in which they are marketed, sold and supplied.

Selective distribution arrangements are sometimes used where the nature of the product requires a high level of service or advice at the point of sale to the customer and where the supplier or manufacturer will be required to provide after-sales support (for example, in relation to high value cosmetics, pharmaceutical products and electrical goods).

If you wish to establish a Selective distribution arrangement, you need to bear in mind that the exclusionary nature of such arrangements can cause competition law problems and you may need to satisfy yourself that any conditions imposed by a selective distribution system satisfy relevant completion law rules and can be objectively justified.

Conclusion

Ultimately, in every case, the decision to appoint a distributor, the type of distribution arrangement chosen and the terms and conditions of the relevant distribution agreement is based on the unique set of circumstances. However, the earlier you create your strategy and more thoroughly you prepare and carry out your due diligence, the better your chances are of making any distribution arrangement work. In order to maximise your return, you need to be in control of the process from start to finish, which requires detailed thought, preparation and planning. Determining your objectives and setting your goals early on when seeking to enter a new market and appoint a distributor, choosing the appropriate type of distribution arrangement and concluding a well thought through distribution agreement, and creating a viable plan and keeping it up to date means that you will be ready to take advantage of any good opportunity to develop your business and increase the prospects of making your distribution arrangements a success.

Read more about distribution agreements

You can read more about distribution agreements on our dedicated page on Distributors and Distribution Agreements.

Need to talk about your distribution agreements?

Whatever stage of the process you have reached, we can help you to understand the different legal and related commercial issues when entering into a distribution arrangement in a new market, to choose the option that is right for you and to help you develop your business.

Contact us to discuss your distribution agreements

If you would like more information about entering into a distribution arrangement or would like to discuss a potential or existing distribution agreement, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us

 

Back to News Home