Are you thinking of signing on with a wholesale distributor? Working with a distributor can help you increase sales, expand your market, and focus on other parts of your business since you won’t have to oversee distribution. But, before you sign with a distributor, it’s important you learn about a distributor agreement. Here are some things you need to consider before signing on the dotted line:
Exclusive vs. Nonexclusive
Distributors may ask you to give them exclusive rights to sell your product in a certain geographic region. This means you will not be able to work with any other distributor in this region for the length of the contract. Signing an exclusive agreement with a distributor should only be done if you have reasons to believe he is more than qualified to do the job. Make sure you carefully research a distributor before signing an exclusive agreement to ensure his previous clients were satisfied and he has experience selling products in your industry.
You should also consider what territories your distributor is planning on covering before you sign the agreement. If you give the distributor too much territory, it may be unrealistic to expect to see a great deal of results. Talk to the distributor about what markets he currently works in, and make sure you are not giving him more than he can handle. Remember, if you have to cut back on his territory, you can always hire other distributors to handle the additional markets.
After the Contract Ends
Even if you carefully vet different distributors before making your decision, the one you choose could still not work out for one reason or another. Because of this, it’s imperative that you have a contract that details what will happen once the relationship ends. Carefully spell out the responsibilities of both parties—including what to do with excess inventory, when credits will be given, how the distributor will be notified of the termination of the contract and other issues. Taking the time to make sure these aspects are included will save you from potential legal disputes after the contract is terminated or expired.
Some distributors will ask you to include price restrictions in the contract that prohibit you from making price adjustments for a certain period of time or limit the number of adjustments you can make. Whether you agree to this or not is your choice. But, keep in mind you can’t control some factors that could impact your price. If a supplier of one of your product’s ingredients raises his price, you will need to increase yours if you don’t want this change to affect your margin. But, if your distributor agreement prohibits you from doing so, you could find yourself dealing with razor thin margins until the contract term is up.
What do you wish you knew before signing a distributor agreement? What red flags do you look for when you sign contracts with new distributors? If you have any tips, share them in the comments below!
We are in negations with a distributor for distribution in our area. One of the red flags for us is a termination clause. If we terminate the contract we have to pay them 75% of our prior year sales as a penalty. So if we do 1MM in sales we would have to cut them a check for 750,000.00. Is this normal in the food distribution business? Any advice would be helpful.