Introduction

A distribution agreement is a crucial document for businesses that want to expand their market reach without managing the entire supply chain themselves. If you’re planning to sell your products through a third-party distributor, you’ll need a distribution agreement to outline the terms and ensure that everyone is on the same page. But what exactly goes into a distribution agreement?

Read: Why you should always have a contract when doing business

The basics of a distribution agreement

At its core, a distribution agreement is a legal contract between a supplier (that’s you) and a distributor (the one who will sell your products). This agreement grants the distributor the right to sell your products in a specific territory or market. It covers everything from the distributor’s responsibilities to payment terms, and it’s designed to protect both parties while setting clear expectations.

Think of it as the rulebook for your business relationship. It ensures that your products are sold the way you want them to be, and that you get paid fairly and on time. Without it, you’re leaving a lot up to chance—and that’s not a great strategy for business.

Key elements of a distribution agreement

To make sure your distribution agreement is rock solid, here are the key elements you should typically look to include:

Parties involved

First things first, clearly identify the parties involved. This includes the full legal names and contact details of both the supplier (you) and the distributor. It’s crucial to get this right—after all, you want to make sure you know exactly who you’re doing business with.

Grant of rights

This section outlines the rights you’re granting to the distributor. Are they getting exclusive rights to sell your products in a certain region, or will you have multiple distributors in the same area? Be specific about the territory, the products involved, and whether the distributor has exclusive or non-exclusive rights.

Obligations (promises) of the supplier

As the supplier, you have certain responsibilities under the agreement. This might include providing the distributor with marketing materials, training, or technical support. You’ll also need to ensure that your products are delivered on time and meet the agreed-upon quality standards.

Obligations (promises) of the distributor

The distributor’s duties are just as important. They’re responsible for marketing and selling your products, maintaining adequate inventory levels, and complying with any branding guidelines you provide. You might also require the distributor to meet specific sales targets—after all, you want to know that they’re actively pushing your products.

Payment terms

Money matters, so make sure the payment terms are crystal clear. This includes how much the distributor will pay you for the products, when payments are due, and what happens if payments are late. You might also want to include details about currency, payment methods, and any applicable taxes or duties.

Pricing and discounts

Will the distributor have the ability to set their own prices, or will you dictate the pricing strategy? This section should also cover any volume discounts, rebates, or promotional pricing that might apply. It’s important to strike a balance—while you want your products to be competitive in the market, you also need to protect your margins.

Marketing and promotion

If you expect the distributor to take an active role in promoting your products, this needs to be spelled out in the agreement. Specify what marketing activities they’re required to undertake, and whether you’ll provide any support or co-op marketing funds. Remember, the more visibility your products have, the better they’ll sell.

Intellectual property

Your brand is one of your most valuable assets, so it’s important to protect it. Include a section that outlines how the distributor can use your trademarks, logos, and other intellectual property. Make sure to set clear limits on how your brand can be represented, and what happens if the agreement is terminated.

Confidentiality

In the course of doing business, the distributor may have access to sensitive information about your products, pricing, or business strategies. A confidentiality clause ensures that this information is kept under wraps and isn’t shared with competitors or used for any purpose other than selling your products.

Liability and indemnity

It’s essential to cover your bases when it comes to liability. Specify who’s responsible if something goes wrong—like if a product defect leads to a customer lawsuit. An indemnity clause can protect you from legal and financial repercussions caused by the distributor’s actions.

Termination and renewal

No business relationship lasts forever, so it’s important to have a clear plan for how the agreement can be terminated. This section should cover the grounds for termination, the notice period required, and what happens to any unsold inventory. If you’re open to renewing the agreement, outline the process and any conditions that need to be met.

Dispute resolution

Even with the best of intentions, disputes can arise. A dispute resolution clause outlines how conflicts will be handled—whether through mediation, arbitration, or the courts. This helps prevent minor disagreements from escalating into full-blown legal battles.

Governing law and jurisdiction

Specify which state’s laws will govern the agreement and where any legal disputes will be resolved. This is particularly important if the distributor is based in a different state or country, as it clarifies which legal rules will apply.

Read: The top 5 contract negotiation tips for your business

The importance of a well drafted distribution agreement

A solid distribution agreement isn’t just a formality—it’s a vital tool for ensuring a successful business relationship. It provides clarity, reduces the risk of misunderstandings, and sets the stage for long-term collaboration. Without it, you could face issues like inconsistent pricing, poor product representation, or disputes over payments and responsibilities.

In short, a well-drafted distribution agreement helps you protect your brand, maintain control over your products, and build a strong partnership with your distributor. It’s worth taking the time to get it right.

Read: How to read business contracts like a lawyer

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

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Conclusion

Whether you’re expanding into new markets or simply looking to boost sales through third-party channels, a distribution agreement is essential. It’s the foundation of your relationship with your distributor, outlining the terms and expectations that will guide your collaboration.