Expand Your Small Business with Distribution Agreements

When it’s time to take your business to the next level and move beyond the scope of your local community, you’ll know. Customers are contacting you from all over wanting to get your product -- but how can you get it to them? Finding and hiring the right distributor takes careful due diligence in the selection and agreement processes. Once you’ve interviewed distributors, checked references, and are ready to enter into a distributor relationship, it’s time to deal with the distributor agreement.

The distributor most likely has a template agreement ready for you to sign, but in some cases you’ll need to draft your own (with the help of an attorney). In any case, you’ll want to make sure you follow some basic guidelines before you sign an agreement.

Start Out Slow

The distributor may have terrific references and promise you great territory coverage right from the beginning. It’s often a good idea, however, to start out with a smaller area and a limited number of products when you first enter into the relationship. You can even stipulate that both territory and number of products are subject to expansion once a probation period has passed. Start out with the distributor in a known territory, and then check in with your customers to make sure they’re happy with the distributor’s service.

Termination Clauses

Things happen, and for one reason or another, either you or the distributor may want out of the relationship. Most agreements allow for Termination for Cause or Termination for Convenience. Usually termination requires at least a 30-day notice from either party. With both of these clauses in place, there is little risk of legal battles in the future. Another way to go is to include an Annual Termination and Semiautomatic Renewal clause that states the contract is terminated after one full calendar year. At the same time, the clause should state that the contract automatically renews for another year; if either party doesn’t want to renew, they must submit written notice. Your agreement should also stipulate what happens to remaining inventory, customer lists, and the like once the relationship is terminated.

Other things to look out for:

• Price changes: Does the agreement include any stipulations for price changes from either party? In a rough economy, you may need to adjust your pricing -- and you’ll need to pass on those changes to your distributor.
• Exclusivity: Will you allow the distributor to represent other, similar products in the same territory?
• Amendments: How and when can amendments be made to the distributor agreement?