Business leaders rely on distribution agreements to expand their operations and reach new markets. But negotiating them can be extremely difficult. There are always two sides to any contract that need to be appeased — not to mention plenty of special legal considerations to keep in mind throughout the process. This article will review those challenges and provide tips for successful distributor contract negotiations.
A distribution agreement is a contract between two parties, often referred to as the supplier and the distributor. The agreement outlines the details of each party's responsibilities and the terms of their collaboration. Generally, the supplier is responsible for manufacturing and selling products while the distributor is responsible for carrying and marketing the product to retailers or customers in their locality.
Distribution contracts can vary from situation to situation, but always cover the same fundamental bases, including provisions for:
By outlining these and other details, a distribution agreement helps ensure that both parties know their rights and responsibilities throughout the duration of their collaboration.
Sales agreement negotiation can be a notoriously difficult process, as there are two powerful sides to every arrangement, and each wants an advantageous outcome. Success depends on collaboration from both parties, as well as a proper strategy.
Here are a few best practices to keep in mind when negotiating a distribution agreement:
Avoid aiming for exclusive sales rights at first if you can. Incentivizing exclusivity with discounts or product improvements is often a more successful way to obtain it.
Don’t try to tackle every area of marketing from the beginning. Focus on areas with clear, achievable goals and objectives. Once these are accomplished, you can then move on to more complex topics.
This often gets overlooked during negotiations, but after-sales requirements should be outlined. These can include anything from warranties to product returns and refunds.
Make sure that both parties understand exactly which countries, regions, and/or cities will be covered by the agreement before it is signed. This helps avoid potential conflicts down the line.
If possible, have a third party handle any regulatory obligations. This ensures that the supplier and distributor can focus on marketing, selling, and shipping without having to worry about legal compliance.
While the steps outlined above seem simple enough, following them won't guarantee a successful outcome.
In addition to best practices, there is also a number of distributors that fail to avoid during negotiations.
Here is a look at some of the most common:
Any contract — whether it be for distribution or any other agreement — should be thoroughly reviewed by multiple parties prior to finalization.
All too often, companies choose to either have their sales manager or lawyer exclusively sign off on documents without obtaining proper input from the other side of the dynamic. This often results in a final distribution that is commercially viable but not legally sound, or legally sound but not commercially viable.
To have one that is both, it is important to involve legal and commercial personnel in the review process.
Tax laws vary from country to country, and failure to pay attention to them could have serious consequences. Before signing a distribution agreement, both parties should be aware of the applicable tax laws in their respective jurisdictions.
Proper due diligence is essential to any business transaction. It is especially important when it comes to negotiating a distribution agreement, as it will help mitigate any potential legal or financial risks. Companies should research their potential partners’ financials, legal history, and customer reviews before signing any documents.
Shoot first, talk later. In most cases, the party which drafted the initial template from which the negotiation derives will probably have the upper hand. Share the template you created with your best terms in mind, and then negotiate the clauses. Most people don’t want to complain about all the clauses, they pick the first few they are most bothered by. This is your chance to get what you want on most of the topics.
Distribution contracts play an important role in scaling any company. By making sure you understand them, you can protect your business and ensure successful collaborations with its partners for many years to come.
