Distribution Agreements for Small Businesses
Many up-and-coming small businesses fail for this very reason. They have the right product, but they market it the wrong way, and their distributors don’t hold up their ends of the bargain. If they want their products to fly off the shelves, small businesses need to have beneficial distribution agreements.
Although most distributors and retailers have their own distribution agreements, which inevitably favor the distributor’s interest, you must enter negotiations with your own interests at heart, and here are a few key factors which should be taken into consideration.
Distribution Agreements Key Point #1: Territory
Every distributor and retailer has a specific territory to which it markets. For example, Jen’s Bakery on East 43rd in Manhattan markets to consumers on that specific block, and perhaps customers within a four- or five-block radius. On the other hand, JC Penny markets to customers all over the United States.
Depending on the product that your small business manufactures, you should target distributors who can reach your core market. Your distribution agreement should specifically state the territory that the distributor is supposed to cover.
Distribution Agreements Key Point #2: Exclusivity
Most distributors will ask that you given them exclusivity for the product that your small business manufactures. This is not always in your best interest, however, so there should be provisions that must be met in order for the distributor to maintain its exclusivity. For example, you could say that Jen’s Bakery will be the only outfit to provide your products within a five-block radius as long as they move a specific amount of product each month.
Distribution Agreements Key Point #3: Obligations
In order for a distributor to move your small business’s products, certain marketing incentives must be in place. A broad provision, such as ‘the distributor agrees to put for its best efforts to market ABC product’, is not necessarily sufficient. Instead, put specific details in the distribution agreement that explain what steps the distributor should take to move your product.
Distribution Agreements Key Point #4: Trademarks & Logos
The term “reputation by association” can become a serious legal ramification in distributor/small business relationships. The distribution agreement she specifically state that the distributor is not to use your trademarks, logos, slogans or other identifying marks without prior written consent unless so stipulated in the distribution agreement.
Distribution Agreements Key Point #5: Product
There should be a section of the distribution agreement geared directly toward your small business’s product(s). How will inventory be handled? What about defective products and/or returns?
Distribution Agreements Key Point #6: Service Issues
This section of the distribution agreement should detail exactly how product servicing will work. If there is a defective product, or if a repair is required, who will handle those issues? And how will that party be compensated?
Distribution Agreements Key Point #7: Pricing
Obviously, the distributor will charge more for your product than your small business will charge the distributor. Make sure to include a specific price that you will charge the distributor, and how you will handle the distributor’s price range to the public. If the distributor charges too much, your product will not move; if they charge too little, the profit margin will not be sufficient. Try to be flexible.
Distribution Agreements Key Point #8: Termination
A specific section should deal with termination of the distribution agreement either by the distributor or by your small business. What are the penalties for early termination? And under what circumstances will termination be tolerated?
