Distribution Agreement: Definition, Key Terms, How It Works

What is a Distribution Agreement?

Distribution agreements are contracts between a distributor and manufacturer. They are also sometimes called wholesale distribution agreements, though not all distribution agreements are wholesale in nature. They often allow the distributor to sell, market, and profit from the sales of a manufacturer’s or wholesaler’s product in bulk. However, it is not a requirement for all distribution agreements. Distribution agreements can also cover distribution of products in smaller quantities or through different channels. A distribution agreement typically uses the terms and conditions that address territories, exclusivity rights, reporting requirements, and more.

If you need a distribution agreement, you should consider the essential parts, how they work, types of distribution agreements, when to use one, and how to get help drafting one.

Parts of a Distribution Agreement

Parts of a distribution agreement vary according to the transaction type. Both parties must determine if they want to enter into an exclusive or non-exclusive deal first. You should also consider the type of distribution strategy including selective and intensive strategies.

Below is a basic distribution agreement checklist to help you get started:

• Names and addresses of both parties
• Sale terms and conditions
• Contract effective dates
• Marketing and intellectual property rights
• Defects and returns provisions
• Severance terms
• Returned goods credits and costs
• Exclusivity from competing products
• Ownership of product provisions

There may be other parts of a distribution agreement to include in your contract that isn’t listed here. Business lawyers are able to understand your objectives and translate them into a legally binding and enforceable distribution agreement.

How Distribution Agreements Work

The distributor directly sells products to retailers and consumers on behalf of the manufacturer. Instead of the manufacturer paying for the cost of sales, this responsibility falls on the shoulders of a distributor. Profitability from already recognizable and developed products and services is what the distributor is after from the transaction.

The following steps outline how finding and negotiating a distribution agreement works:

• Step 1. Set an appointment with the manufacturer
• Step 2. Negotiate the distribution terms
• Step 3. Review specifics, such as promotional literature
• Step 3. Hire a business lawyer to help you draft the terms
• Step 4. Sign or renegotiate the contract
• Step 5. Begin executing the agreement as contained within provisions

You should also decide which type of distribution agreement you want your company to use. The decision you make will affect critical marketing and legal aspects, which means the decision should be made carefully. Business attorneys are licensed to offer legal advice at every crucial point in the negotiation and contract drafting process. While it is advisable to seek legal advice when drafting a distribution agreement, it is not the only option available. You can also utilize templates or online resources to create a distribution agreement.

Here is another article about how distribution agreements work.

Types of Distribution Agreements

The type of distribution agreement to select depends upon the type of transaction in which you are engaging. It’s vital to choose the proper agreement so that it can perform its contractual purpose of protecting both party’s rights.

There are four distribution agreement types including:

• Type 1. Exclusive distribution agreements: An exclusive distribution agreement is a contract between a manufacturer/supplier and a distributor, in which the distributor is granted the exclusive right to distribute the products within a specific geographic area or market segment. During the term of the agreement, the manufacturer agrees not to appoint any other distributor or sell the products directly in that designated area or to that segment.
• Type 2. Wholesale distribution agreements: A wholesale distribution agreement is a contract between a manufacturer/supplier and a distributor, where the distributor is authorized to purchase products at wholesale prices to resell to retailers or end consumers. This agreement typically covers terms like product pricing, order quantities, delivery, payment terms, etc.
• Type 3. Distribution agreements for commissions: A distribution agreement for commissions refers to a contract between a supplier/ manufacturer and a distributor, where the distributor is compensated based on commissions from sales. Rather than purchasing the products at a wholesale price and then reselling them, the distributor acts more like an agent, earning a commission for each sale made or achieving certain sales metrics.
• Type 4. Developer distribution agreements: A developer distribution agreement refers to a contract between a software developer and a platform provider or distributor. The agreement governs the distribution of the developer's software or application on that platform. Examples of this are app stores like Google's Play Store, Apple's App Store, and others.

Let’s look closer at each type of distribution agreement below:

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Exclusive Distribution Agreement

Exclusive distribution agreements are distribution rights granted between a distributor and supplier company. Both parties agree that the distributor will give exclusivity rights to the supplier to sell certain products or services instead of non-exclusive rights. This strategy creates competitive barriers to participation.

Provisions to consider when drafting distribution agreements include:

• Provision 1. Minimum purchase requirements
• Provision 2. Purchase order cancellations
• Provision 3. Defined geographic locations
• Provision 4. Handling purchase orders and deliveries
• Provision 5. Representations of warranties and guarantees
• Provision 6. Dispute resolution requirements
• Provision 7. Force majeure clauses

Wholesale Distribution Agreement

Wholesale distribution agreements are between a distributor and manufacturer. They define the terms and conditions surrounding distribution within a specific territory. The distributor must sell goods and services as outlined within the wholesale distribution agreement.

Provisions to include in a wholesale distribution agreement include:

• Provision 1. Applicable geographic territory
• Provision 2. Information about the products to be sold
• Provision 3. Prices at which the distributor must sell the products
• Provision 4. Minimum number of sales and purchases
• Provision 5. Non-competition agreements
• Provision 6. Payable royalties and commissions
• Provision 7. How to terminate the agreement
• Provision 8. Responsibilities of handling specific costs and fees

Distribution Agreement for Commissions

Distribution agreements for commissions define a distributor’s compensation from meeting or exceeding manufacturer sales goals. Commissions will vary according to the particulars and value of products sold. These types of agreements provide an excellent way to encourage growth and sales while rewarding channel partners commensurately for their efforts.

Provisions contained with commission distribution agreements include:

• Provision 1. Sales goals that trigger commissions
• Provision 2. Details on commission tiers
• Provision 3. How to facilitate payouts
• Provision 4. Percentage of commissions
• Provision 5. Agreement termination requirements
• Provision 6. Handling disputes and disagreements
• Provision 7. Guarantees and warranties

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Developer Distribution Agreement

Developer distribution agreements let distributors know how software and application developers want them to distribute the product. They also define the overall relationship between the distributor and developer. It’s essential to draft the formal agreement the first time around to avoid the chance of facing a future dispute.

Examples of developer distributors include:

• Example 1. Google Play Store
• Example 2. Apple Store
• Example 3. Microsoft Store
• Example 4. Oculus Store
• Example 5. Channel Partners

Ensure that you consider the terms and considerations of a developer distribution agreement carefully since they can affect your company’s performance and future. Here’s a page containing an example of a distribution agreement.

Who Needs a Distribution Agreement?

Anyone engaging in the distribution of another company’s product or services usually needs a distribution agreement. While it is generally recommended to have a distribution agreement in place, it is not always a legal requirement. The need for a distribution agreement depends on various factors, including the nature of the products or services, the relationship between the parties, and applicable laws and regulations. Businesses must use distribution agreements to facilitate clear guidelines among the parties while providing a legal record of the formalized agreement.

The following business types may need distribution agreements:

• Type 1. Wholesalers
• Type 2. Manufacturers
• Type 3. Retailers
• Type 4. Software companies
• Type 5. Beauty products
• Type 6. Clothing and accessories
• Type 7. Electronics
• Type 8. Brands

Ultimately, you can determine if you need a distribution agreement by speaking with lawyers directly. They can also help you establish whether you should have other contracts in place.

Here’s the website for the National Association of Wholesale Distributors for more information.

Drafting or Reviewing Distribution Agreements

Drafting or reviewing distribution agreements is another aspect of the contract writing process. From some parties, it is challenging to determine if the proposed contract is fair, whether you are the author or signer. The most practical way to overcome any doubt is by hiring contract lawyers to help you through the process.

Contract lawyers can help with the following:

• Negotiation of the terms and conditions
• Providing legal advice and professional insight
• Sending emails and letters to both parties
• Acting as a communication hub for all parties
• Explaining the legal terms of the contract
• Drafting and revising the agreement
• Settling disputes between you and your channel partners
• Adding amendments and restatements to your contract
• Representing your contract agreement in arbitration or court if a dispute arises

A distribution agreement is only as good as the language contained within it. If your agreement is unenforceable or illegal in some capacity, these legal mistakes can result in unintended consequences. Instead of leaving your business deal to chance, hire contract lawyers to ensure that your and your company’s rights are protected throughout the process.