Distributor Agreements
An Article by Patrick Sutton, partner of O’KellySutton in the Sunday Business Post 8th December 2013
The Appointment
To facilitate growth and expansion, businesses often look to the appointment of a distributor (an agent or representative). Finding a distributor who is the right fit for your business is of critical importance. They should already be successful and established, and your product should be complimentary to their existing product range and customer base. Key factors to consider when making your selection often includes the distributors; sales force, sales record, territories they cover, existing product mix, facilities & equipment, marketing policies, customer profile and customers already represented, and promotional thrust. At the selection stage get a clear understanding of the IT and communications systems being used by the potential distributors. There should be the highest quality means of sharing data and integrating logistics.
Agree in advance the timing and mechanisms for annual and quarterly planning, monitoring, reviews, including roles and responsibilities and decision making criteria.
There’s little point allowing a distributor to take your product if they already have successful competing products. Indeed your products may even be taken on by the distributor so as to block or delay your route to market.
Thorough research is required in advance to identify suitable targets for example make enquiries from existing or target customers as to who are the best and most suitable distributors. Select at least three distributors for interview, then prepare a compare and contrast analysis.
The Agreement
Document the key commercial variables for doing business first before you start to worry about the structure of the agreement itself. Commercial matters to consider often include;
- What pricing structure, and payment terms would you be satisfied with? A pricing schedule should be worked out that makes it attractive for both parties. No point trying to squeeze the distributor to the point that it’s not attractive enough for them to push the products. Recommended retail price less an agreed discount is often used. This discount will depend on the volume, complexity and nature of the products. It may also depend on what end price the market can bare.
- How much support will be provided by the distributor (sales aids, promotional material, advertising, online campaign etc.), training for sales and service staff, and the company’s ability to actually deliver on the supports schedule? The distributor will also require certain marketing and service supports from the company itself. Its better these are addressed at the outset. If product training or sales training or materials localisation is required, ensure that the agreement details how these costs will be met
- Where do you stand with regard to distributor supplying competing products? You need to upfront it with the distributor as to what products or product types you are not happy for them to distribute when dealing with your range.
- What minimum sales quantities will you set and annual growth rates? No point entering into an agreement where the distributor doesn’t have any targets to drive them on. If they’re not prepared to entertain such targets your probably talking to the wrong partner.
- Under what conditions might you consider exclusivity? For example exclusivity might be given in certain territories for a period of time, subject to agreed performance targets. Targets typically include sales volumes, territory penetration, key account delivery, customer numbers, and/or promotional events covered.
- What territory will the distributor be given? You may need to consider carve outs in terms of specific territories or activities you may want to continue servicing yourself. It could be you continue to trade online, or continue to service a particular part of the country which you feel is more suited to you directly. In some instances there may be certain Key Accounts which you will retain in-house and not be given to the distributor for whatever reason. It’s important to agree the distributor will refer all enquires outside of their territory back to you so they are not lost or end up in the wrong hands.
- Termination clauses must be agreed regardless of whatever else is included in the agreement i.e. 3 to 6 months notice to terminate is not uncommon. You don’t want an agreement you can’t get out of. Special attention must be paid to safeguarding your interests in cases where the distributor proves less than satisfactory. It is vital to include an escape clause in the agreement, allowing you to end the relationship safely and cleanly if the distributor does not fulfill your expectations. The contract may also spell out exactly what constitutes just cause for ending the agreement (i.e., failure to meet specified performance levels). Other contracts specify a certain term for the agreement (usually one year), but arrange for automatic annual renewal unless either party gives written notice of its intention not to renew.
When all the commercial aspects are worked out and agreed with the distributor you can get a solicitor to pull an agreement together. A good commercial solicitor will identify any areas you’ve missed.
Finally, when up and running make sure there is continuous dialogue with a structured reporting system. Distributor performance must be measured regularly so that decisions can be taken early. Patrick Sutton, O’KellySutton Chartered Accountants and Business Advisers, Kildare, Sutton@okellysutton.ie,
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