A distribution agreement is used when someone has goods and they seek to hire someone else in a different territory to sell those goods on their behalf. A lot of times as you’re growing as a startup or a small SME, you don’t have the resources to go everywhere, you don’t have people on the ground to go everywhere for you, so a lot of times you grow your business using a distribution agreement.
The problem is, is that you don’t want that your distributor to then find another product that’s competing with your product and start selling that instead, because that person has built up a lot of networks based on the product being your product.
So the essential cause normally in a distribution agreement is the intellectual property clause, making sure that if you send the packaging the packaging stays the same and they’re not tampering with your brand, they’re not tampering with your trademark, they’re not tampering with your ingredients.
The other thing that’s important is to make sure you have a minimum sales requirement. That is, is if you’re going to give a territory to somebody to sell your goods, you want to be able to terminate that agreement if the distributor is not selling the amount of goods that you thought they would.
This is because you want to find someone else to be able to sell the goods on your behalf, and therefore you put a minimum sales target into the agreement that says ‘you must sell this much and if you do not it gives us a right to terminate the agreement’. Other clauses to consider is whether you want to do market segregation. That is, you have a distribution agreement where you might grant a distribution to someone in somewhere for hospitals, but you could also give another distributor another product or another distribution agreement for universities. In that way you can actually have a very niche specific distributor dealing with specific territories, but also specific markets.
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