5 must-have elements of distributor agreement- A Perspective from Distributor
Anyone who has attended a distributor meet or conference will agree that mostly these conferences are one-sided boring affairs. Sales managers make series of presentation during the day and distributors are counting hours to the evening when they can relax and have entertainment at company expense.
It was during one such meet wherein a sales manager invited a distributor to express his opinion on the current distributor agreement. Some inputs really provided points to ponder, so we thought of sharing a summary here…for a full transcript, you can register at Selloverseas.com and read more.
The below points are from viewpoint of a common distributor, not a legal expert. An online search gives points from legal angles developed by the lawyers, good for negotiation in courts but hardly helps binding parties to develop sales.
Flexible to accommodate the dynamic environment
Manufacturer and distributor relationships are organic i.e. they evolve, develop, grow, mature, and finally decay. They are part of the dynamic environment that gets influenced by external factors hence should allow changes and amendments on a need basis rather than a fixed time period.
Most of the distributor agreements or franchisee contracts are either drafted by in-house legal teams or solicitors, lawyers whose primary interest is to protect their clients.
No one is contesting that it is not required but mostly it is always tilted in favor of manufacturer or supplier as lawyers want it to make watertight for their clients which are mainly companies. The legal jargon used is somewhat difficult for a common distributor and generally gives no room for changes or amendments before the next renewal.
Credit Risk Insurance –wholesome approach.
While appointing a distributor most manufacturer vets distributors for credit risk and takes out insurance for an agreed credit limit. Generally, distributors works on the 80/20 rule i.e. 80% revenue coming from 20% customers.
It would be extremely helpful if manufacturer’s can work out tri- party agreement with insurance companies for top 20% of distributors accounts to help their distributors derive benefits of credit insurance with the help of principle company. For payment security most distributors are willing to share insurance premium.
A wholesome distributor agreement indicating conditional credit limits can create a win -win situation for all stakeholders.
Distributors prefer price changes only once a year, however this may not bode well for partnership as manufacturers must have opportunity to pass on inflationary increases and rising cost to secure operating margin.
The distributor agreement should include a clause to safeguard distributors from frequent price revisions for e.g. annual rate contracts / or fixed price purchase orders. Flexibility subject to submission of relevant documentary proof will ensure brand loyalty and enhanced market share for manufacturers also.
Warranty and Spares Sales
Although distributor agreements have clear incoterms for standard supply but spares, warranty replacements and optional accessories normally fall under aftermarket department. The service teams prefer to have separate service agreements which are customized for service partners and rarely meet distributor requirements.
Most customer survey indicates that the companies having comprehensive sales and spares agreement with distributors are able to make more margins and improve customer service.
This is a relatively recent bone of contention between distributors and manufacturers typically fueled by rise of Amazons, Alibaba and online marketplace. Most of the traditional distributors understand that it’s a generational shift wherein customer relationships are changing from personal relationships to digital first , next virtual support as needed and finally followed by onsite visit to confirm and close commercially especially for distribution industrial components or sales of medical devices.
As online element is still evolving, nevertheless it is important for manufacturers and suppliers to build clauses which promote online sales and support through traditional distributors.
It is important to understand that company reputation is not only built by quality product or service but a satisfied distributor, franchisee and sales agent also play important part in creating brand perception and company image. A comprehensive and balanced distributor agreement goes a long way in building mutual trust and stable partnerships.
All registered manufacturers at selloverseas.com can download templates for distributor search, franchisee appointment from Tools/ Template window. Upon request distributor agreement sample template can also be shared for registered business category and zone of interest.
Frequently Asked Questions for a Distributor
A distributor or retailer receives many requests to distribute products than most manufacturers possibly assume. Working capital (inventory management) is lifeline for distributors; which they manage ferociously to protect their profits and margins. Conclusion most distributors will eliminate non-performing product lines or push for hard requirements to prospective new suppliers.
- Start Small
Best way is to connect with local or regional distributors, who are looking to differentiate themselves from LFRs (Large Format Retailers). Approached by fewer suppliers, they are quite flexible in terms and offer personalised constructive feedback.
The inertia build up with small distributors will eventually catch attention of bigger players and may give you a negotiation edge.
- Utilize Network like Selloverseas.com
Working relationships with a network of manufacturer’s agencies or sales agent network like Selloverseas.com can bring your product to the attention of a larger distributor. Selloverseas.com not only helps to assess the feasibility but also prepare and understand requirements around financial risks, credit insurance and warranty requirements etc.
To answer this question: Retailers use distributors/wholesalers for convenience!
Retailer’s prime objective is to sell product that moves off their shelf.
Think about it: if a retailer is already buying from a distributor, all they have to do is add another item to their cart for the coming week and product arrives.
Now imagine going straight to the factory, asking for product catalogue, setting up a new business credit form, sending business information, setting up efficient ordering/accounting/etc.
Distributors make it easy.
Distributor refers to the middleman who obtains the ownership of goods in trade. Distributor has the right to determine the price.
Agent is a commercial catalyst entrusted by an enterprise within a fixed framework. The legal obligation belongs to the enterprise.
Wholesaler is a commercial organization which purchases products from manufacturers or master distributor, and resells them to retailers. They usually supply in bulk and MoQs (Minimum Order Quantity) applies.
There are many readymade templates available online which can be used to simply modify or amended to suit your specific needs. Or Selloverseas.com consultant can share their practical advice depending on your business category and zone of operation.
Manufacturers normally evaluate a prospective distributor on the following criteria;
- Knowledge of market and business dynamics in the area of representation.
- Sound credit worthiness.
- Available Infrastructure in terms of warehousing, storing and delivery.
- Potential business reaches for e.g. sales network, customer contacts and affiliations within business associations etc.
There are many online business directories (FREE and PAID options) available. However, in India screening, verification, language diversity and local tariffs requirements makes it difficult to connect with decision-makers and conclude.
It is advisable to use of services of professionals who offer both options- online targeted POSTING as well as the creation of optimized distributors list from the field; keeping in view your specific business and geography requirements.
The USA being matured market best option could be looking at B2B market place like Global Sources (USA), Buyer Zone (USA) Or Join Industry Groups, Forums, and Other Professional Networks. To save time and effort, many companies appoint commission-based sales representatives or manufacturer’s reps companies to expand sales channels.