If you are setting up a distribution network, you are not only faced with the choice between exclusive distribution or selective distribution. The choice of a distributor is also an important one. An experienced distributor with industry knowledge, local knowledge and many contacts can make an important contribution to your success. What should you look for?
Knowledge and experience
The knowledge and experience of a distributor is crucial. How much experience does the intended distributor have in your industry? How much knowledge does he have of products like yours? Is he a member of a trade association? Does he have the necessary permits and approvals? Is he aware of local laws and regulations? If it is a distributor from outside the EU: Does he have experience with import and customs formalities? And what about the necessary logistics: are they available?
Of course it is great if the distributor you have your eye on has a lot of (local) knowledge and contacts, but it is also important to take a critical look at this. What other (competing) products does he sell? And can that get in the way of the success of your product(s)?
What should you consider when appointing a distributor?
Of course, it is important to conduct due diligence and carefully assess the financial standing and stability of the intended distributor. You need to be sure that the distributor can not only pay you, but can also meet its other contractual obligations.
In addition, a so-called integrity due diligence can also do no harm. With integrity due diligence you examine the reputation of the distributor you have your eye on. Who is pulling the strings? How honest do they conduct their business? Do they adhere to (international) laws and regulations, for example in the area of bribery and anti-corruption? Is corporate social responsibility a priority?
Marketing and sales strategy
Finally, it is important that the intended distributor can convince you of his marketing and sales strategy. How will he penetrate the market and achieve consistent growth? Which marketing tools does he intend to use? How will he ensure that these tools are in line with your branding and reputation? And if he uses your marketing material, will he have it translated properly? Sometimes a simple translation is not enough to get your message across properly.
Found a distributor, then what?
Once you have found a distributor you would like to work with, it is time to negotiate a distribution agreement. First, it is important to distinguish the working method of a distributor from that of a commercial agent.
A distributor buys your products for resale. This means that there is no agreement between you and the end customer. A commercial agent is an intermediary who negotiates the agreement between you and a third party on your behalf. For this mediation, he receives a commission. Compare it to a broker. Because a distributor usually takes more risk than an agent, the mark-up and profit margin of a distributor is also usually higher than the commission of a commercial agent.
If you prefer to earn a higher profit margin yourself, and therefore agree in the distribution agreement to pay a commission on the sales that the ‘distributor’ makes on your behalf, you are effectively appointing a commercial agent. As a result, the distribution agreement is legally qualified as an agency agreement, regardless of what name you have given to the agreement. As a result, the stricter rules on agency apply to the agreement. Under these rules, a commercial agent enjoys specific legal protection. Upon termination of the agreement, you will likely still owe the agent a goodwill fee. This is a fee for customers and orders brought in. So pay close attention when negotiation your agreements.
It is also important to think about the degree of exclusivity you agree with the distributor. Of course, complete exclusivity is an excellent way to motivate a distributor. But it will make it harder to appoint new distributors within that territory and it is advisable to also make agreements on any direct sales. So make sure that the degree of exclusivity matches your sales goals.
The choice of a distributor is just as important as the choice of a distribution network and the wording of your distribution agreement. Competition law plays an important role for any agreement with your distributors, especially if you are also selling directly in the market. If you have questions about this or could use help, please feel free to call for an appointment. You can also fill out the contact form.