A distributor agreement, also known as a distribution agreement, is a contract between channel partners that stipulates the responsibilities of both parties. The agreement is usually between a manufacturer or vendor and a distributor but in some cases may involve two distributors or a distributor and some other channel entity.
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The basic elements of a distribution agreement include the term (time period for which the contract is in effect), terms and conditions of supply, and the sales territories covered by the agreement (regions within the U.S. and/or international markets).
The manufacturer or vendor must also determine whether the distribution agreement will be exclusive or non-exclusive. In an exclusive agreement, the specified distributor will be the sole distributor with the right to sell the product within a particular geographic region or within multiple regions. If the arrangement is non-exclusive, the manufacturer or vendor may supply other distributors. The manufacturer or vendor must decide also decide on a distribution strategy when considering what type of agreements to enter. A selective strategy calls for a small group of distribution outlets to cover the channel partner’s target markets. An intensive strategy aims to place the product in front of as many potential buyers as possible through widespread distribution. The latter is typically more applicable to consumer-oriented products as opposed to those designed for commercial markets.
Distribution agreements may be international in scope. The largest electronics and information technology distributors, including Arrow Electronics, Avnet, Ingram Micro and Tech Data. operate subsidiaries in a number of countries for wide geographical coverage.
Following is a checklist of factors to be considered when drafting a distribution contract:
- Terms and conditions of sale.
- Term for which the contract is in effect.
- Marketing rights.
- Trademark licensing.
- The geographical territory covered by the agreement.
- Circumstances under which the contract may be terminated.