Agency agreements and distribution agreements – what is the difference?

There are many ways to sell what you supply.

Agency and distribution models are two of the most common ones, if you’re not planning to supply the end consumer directly.

Both are quick and powerful ways to increase market penetration, exploit new markets and boost sales.

They can be particularly useful and efficient models when you’re expanding into new locations, where you might not have an established customer network or knowledge of the local trading laws.

There are some fundamental differences between the two models.

Our guide examines the main differences, to help you to decide which one might work best for you.

We’ll also take a look at how you can select the right agent or distributor for your business and on what terms, and what to include in your contract.

This is also vital to the success of your approach, not least since agency and distribution relationships tend to last for many years.

Agency agreement & distribution templates

You can use our template agency and/or distribution agreements to cement your sales arrangements when you’re ready.

Agency vs distribution agreement – some key differences upfront…

When might you want to use an agency relationship?

And when might you want to use a distribution relationship?

It’s a common question among many business owners thinking about moving their business in this direction – while the 2 do have some similar aspects, they are 2 very different working relationships – and it’s very important you know which one is best for your business.

Let’s take a look at the differences of each…

1. Who owns the goods and is named as the seller of them?

An agent sells in your name and on your behalf and is never named as the seller of the goods.

It is effectively a facilitator or introducer, acting as an intermediary between you and the end customer.

It never takes ownership over your goods and typically incurs little to no risk in respect of them (you’ll probably have to insure the agent in respect of any action it takes on your part).

While the agent usually has your authority to create a contract between you and the customer, you remain directly and contractually liable to the customer and you take the credit risk on the customer.

By contrast, the distributor is your customer, even if it isn’t the final one that you’re targeting.

The distributor buys from you, takes over ownership of your goods and sells to its customers (who should be aligned with your intended target customers).

The distributor takes the credit risk on the customer, you take the credit risk on the distributor.

Distributors tend to take on a lot more financial risk than agents, but they tend to recoup this in their margins on resale of the goods, which are generally of a higher value than the commission paid to agents.

2. How do you pay?

You pay the agent a commission on sales, typically a percentage of the net sales value of the goods sold.

Under EU and Irish law, you may also have to pay an agent compensation for terminating an agreement (unless the agent has breached its contract with you) and on the expiry of the agreement.

The compensation covers sudden loss of commission and any set-up costs or expenses not yet recouped. (Take a look at our short guide to the Commercial Agent Regulations for more information about how this can affect you.)

You don’t pay the distributor.

The distributor buys the goods outright from you and then takes a margin on the re-sale of the goods to the target customer.

You can generally terminate a distribution agreement without incurring any financial liability, though take care with overseas distributors as sometimes their local laws may impose additional obligations on you that could include financial recompense on termination.

3. How far can you influence the terms of the sale to the target customers?

You direct the agent on how to sell your goods.

The agent will follow your instructions and has little latitude over the sales process.

The agent will price as you direct and sell to those whom you approve.

You have far less control over what the distributor chooses to do with your goods.

In particular, while you can prevent the distributor from pricing your goods above a certain price threshold, you are otherwise not legally permitted to dictate the price that the distributor charges and you have less influence over its choice of customers as well.

4. What rights do you give?

Both agents and distributors can be given sole, exclusive or non-exclusive sales rights over your goods.

What do these terms mean?

Sole agent/distributors

The only one with the right to sell your products in a defined territory (location or to specifically designated customer groups).

Sole agents or distributors are protected from you appointing other distributors, agents or resellers in a given area or anywhere.

As the Supplier however, you won’t be prevented from actively seeking sales and directly supplying customers in the same area.

Exclusive agent/distributor

The only agent/distributor to sell within a particular defined market or area.

Appointing an exclusive agent or distributor prevents you from appointing another one in the territory allocated to that exclusive one, but won’t prevent you, as the Supplier, from operating in the same area or from reserving certain activities to yourself; provided that you make this clear in the wording of what’s agreed – our template gives you this drafting option later on, don’t worry!

If you intend to appoint someone exclusively, double check that nobody else already has rights to sell your goods anywhere where your exclusive agent/distributor will be allowed to sell.

If you don’t want to bring any pre-existing, conflicting arrangements to a close, make sure you carve them out of this agreement (as ‘reserved customers’) or consider an alternative form of distribution model.

If you already have or intend to have, any other exclusive agents/distributors in other territories, then to keep commercial peace and achieve focused productivity, you’ll probably need to ensure that they derive the same benefits and operate on a level playing field with your proposed agent/distributor in this agreement, and vice versa.

To achieve this, you should include appropriate restrictions in this contract and others, preventing your exclusive agents/distributors from actively seeking orders from customers outside of their given territories or customer groups.

If they do this actively, then they will be in breach of your contract terms and you can do something about it.

What you cannot lawfully prevent, however, is a direct and unprompted approach to an exclusive agent/distributor from a customer who is situated in a territory that is allocated to another agent/distributor (called a ‘passive sale’).

That customer must remain free to choose an alternative supplier outside your territorial structures – and this is the case whether the customer’s approach and any subsequent sale is made physically or online.

Non-exclusive agent/distributor

These distributors have the least rights.

A non-exclusive distributor is one who will operate alongside other distributors representing you in potentially the same territory.

You may also continue to sell alongside them.

The comparative advantages of each model

Agency – advantages over distribution

• You’ll have greater control over the sale of your goods (including their pricing)
• Less likely to raise competition law concerns (the law that governs unlawful trade-related agreements between independent businesses). Competition law treats genuine agency relationships as an extension of your business, not an independent business with whom you might agree something unlawful. Again, this gives you greater trading freedoms.

Distribution – advantages over agency

• You can pass on a lot more risk to a distributor – for example, responsibility for what happens to the goods in transit, getting all the import, customs, tax and duties paperwork sorted, finding customers to sell the goods
• As a result of this increased risk, a distributor is arguably even more motivated to make the relationship work, it has more at stake
• You’ll benefit from the efficiency of only one ‘customer’ (the distributor) reporting to you on sales, rather than having to manage multiple individual accounts and relationships created for you by the agent
• There’s no compensation due if you bring the distribution relationship to an end.

When might you want to use an agency relationship?

Here are a few reasons why you might be interested in appointing an agent:

• You want to maintain close control over the sale of your goods
• Your goods may need a dedicated and/or specialist level of after-sales support that you believe you’re best positioned to provide
• You’re happy to spend the time supervising and supporting an agent
• You’re able to warehouse goods efficiently and to supply them directly to customers
• Pricing, branding, customer identities, direct customer relationships and loyalty programmes, for example, are important aspects of your trading arrangements

When might you want to use a distribution relationship?

And here are a few reasons why you might prefer a distributor instead:

• You want to reduce your risk, costs and your efforts in selling the goods in a particular location or to a particular group of customers
• You don’t know the target territory/market well and need experienced support
• You’ve found a suitable distributor capable of marketing and selling your goods in a manner that meets your objectives
• Your products don’t require any specialist sales expertise or after-sales attention
• You’re comfortable that the distributor will sell your goods responsibly and is motivated to sell the right volumes in a manner that is consistent with your brand profile, so that you’re less concerned about having control over those sales
• You prefer to have a more remote relationship with the target end customer and welcome the efficiency of dealing only with the one major customer (the distributor).

What to include in your contract

The protection of your brand, your trading profile and reputation and keeping as much control over the sales outcome as is legally possible, are likely to be factors high on your hitlist for this type of sales relationship.

The good news is that our template contracts contain all the key elements that you’ll need to consider, together with helpful guidance notes explaining the clauses, terms, options and risks that you’ll encounter in these types of relationship.

In summary, we recommend you should be covering these factors in any agency or distribution agreement:

1. What type of relationship is it?

Be clear whether you’re creating an agency or distribution agreement.

Different rules apply to each and in the event of ambiguity, you might find a court interprets the relationship differently to what you intend.

2. Where will the agent/distributor sell and to which customers?

You’ll need to define the geographic boundaries of the sales relationship (‘the territory’) and make clear whether you are reserving any customers within that location to yourself (‘reserved customers’).

3. What type of agency/distribution rights are you granting?

Will you be granting sole, exclusive or non-exclusive rights to your agent/distributor?

4. What’s the product range?

Which of your products will be covered by the agreement and will you expand the range if the agent/distributor is successful?

5. What prices, payment terms and delivery conditions will you set?

These should be clearly set out, ideally in annexes to your agreement, so that they are easily accessible and sufficiently detailed to avoid any confusion or ambiguity about what has been agreed.

Don’t forget to give yourself the right to review and alter your prices during the term.

6. Will you be setting minimum sales targets or performance criteria for the agent/distributor? And what will happen if they fail to meet, or they far exceed them?

Will you include a right for you to terminate the agreement if sales targets or other performance criteria are not met, and or a bonus or other reward for the agent/distributor if they smash the targets?

7. Are after-sales services, including repairs and or maintenance relevant?

Who will manage these, what standards will apply?

Are there any requirements for warranty work, spare parts, etc?

8. Do you want to restrict the freedom of the agent/distributor to sell rival goods?

You can probably restrict your agent/distributor from doing so and may well want to do so in some cases.

The larger the agent/distributor’s business, the harder you may have to negotiate on this restriction, especially if they are already selling competing products to yours.

9. IP rights and protection

You’ll probably want to enlist the agent or distributor’s help in enforcing your IP rights in the territories where they are operating and where infringements by other parties occur.

You’ll also want to make clear that your agreement does not give them any ownership over your IP rights, that they must not damage or undermine these rights and that where you’re providing them with marketing or other materials, you’re granting them a non-exclusive licence to use these as directed, and only for the duration of the agreement.

10. Confidentiality

These types of relationship often open access to your confidential information, from customer lists and business plans to IP rights and know-how.

Ensure you’ve got a clear definition of what you consider to be confidential and set firm directions in place to cover what your agent/distributor can disclose, both during the term and after your relationship has ended.

11. Data protection and other legal/regulatory compliance

You’ll want to ensure that any agent/distributor acts in compliance with all relevant laws and trading regimes and that they empower you also to do so.

12. How long will the relationship last?

These kinds of relationship are seldom short, given the time and effort it takes for agents and distributors to set-up and start promoting and marketing your goods.

But you’ll probably want sensible review and break clauses in your agreement and look out for the impact of the Commercial Agent Regulations as well. (See our guide on the Commercial Agent Regulations for more information.)

A fixed term is the most common approach. It provides certainty while still enabling a renewal at the end of it.

13. What happens if something goes wrong?

You’ll need to spell out what you’ll consider as a fundamental breach of the contract, for which termination is the appropriate outcome.

Will damages and/or liability be capped in any way?

14. Which law and whose courts will govern the agreement?

You’ll want it to be the law that most favours you and to exclude, as far as possible, being called to attend a foreign court or to have to apply a foreign law, if a dispute arises.