In many small businesses, the key to success is how well you can distribute your product. If you are selling retail items, you may want to find an experienced distributor with a great sales force and contacts. The distributor can then contract with dealers and large chains to sell your product.
The key to your relationship with the distributors is the distribution agreement. Although the distributor probably will want to use its own form of distribution agreement, consider the following key terms during the negotiations:
Territory and market
The contract should clearly describe the distributor’s territory or business area. The contract should define the market or customer category. For example, you may want your company to handle certain major customers directly and then have the distributor handle other outlets.
Exclusive or non-exclusive
The contract should state whether or not the distributor has exclusive or non-exclusive rights to the company’s products in a particular territory. But be careful here; you do not want to give exclusivity or non-exclusivity for one territory or market if you face a significant risk of lousy performance by the distributor. If you are going to give exclusive rights, consider setting sales goals that the distributor has to meet in order to maintain exclusivity.
Obligations of the distributor
You must spell out the distributor’s obligations. Ideally, you want a clause that says the distributor must use its “best efforts to market your products,” although the distributor probably resists this phrase. So, consider setting forth in the contract the specific steps the distributor must take: contacting all the major potential customers, appointing dealers, preparing marketing materials and promotional activities, etc.
Trademarks and logos
The agreement should prohibit the distributor from using the company’s name, trademark, and logos in advertising, point of sales activities, and marketing materials except as provided in the agreement or with the company’s prior written consent. This restriction ensures that your company’s goodwill, reputation and brand name are not hurt by the distributor’s activities.
Product issues
The contract needs to clearly describe the product or products that the distribution agreement covers. The agreement may also cover the issue of product availability and allocation of product among other distributors. It should also cover how the distributor may handle product inventory and what rights of return are available.
Additional items for the contract to cover include:
Terms of service
Price
Payment terms
Termination[1]
[1] Richard D. Harroch, Small Business Kit for Dummies, (Wiley 2nd Edition)(2004).
