Drafting and negotiating distribution agreements between manufacturers, brand owners and distributors.
Distributor vs. agent: a distinction with real consequences
A distributor typically buys products from the manufacturer and resells them at its own risk and profit margin, while a sales agent sells on the manufacturer's behalf without taking title to the goods. The distinction affects pricing control, liability exposure and how termination is handled and the agreement should reflect which relationship the parties actually intend.
Core distribution agreement terms
- Territory: precisely defined geographic or market scope, and whether the distributor may sell outside it.
- Exclusivity: whether the distributor is the only authorized seller in the territory, and any minimum performance required to maintain exclusivity.
- Performance targets: minimum purchase or sales volumes, and consequences for failing to meet them.
- Pricing and payment terms: wholesale pricing, payment terms and any minimum advertised or resale pricing considerations.
- Marketing and branding obligations: use of trademarks, required marketing spend and brand standards.
- Term and termination: duration, renewal, termination rights and post-termination obligations such as inventory buyback or wind-down.
- Competing products: restrictions, if any, on the distributor carrying competing product lines.
Exclusivity is a bargained-for benefit, not a default
Manufacturers should condition exclusivity on the distributor meeting defined performance targets, with a mechanism to convert to non-exclusive status or terminate if those targets are not met. Distributors, in turn, should negotiate a sufficient exclusivity term to justify their investment in building the territory.
Termination and post-termination obligations
Distribution agreements should address what happens at termination: remaining inventory, outstanding orders, use of trademarks and marketing materials and any transition assistance. Some jurisdictions impose specific statutory protections for distributors on termination; those should be checked for any territory outside Florida where the distributor operates.
Foreign manufacturers entering the Florida market
A distribution agreement is often the fastest way for a foreign manufacturer to enter the Florida or broader U.S. market without establishing its own sales operation. Where the manufacturer intends to eventually establish a direct U.S. presence, or where a principal plans to relocate to oversee that expansion, the distribution strategy should be coordinated with entity formation and immigration planning from the outset.
Answers
Frequently asked questions
- What is the difference between a distributor and a sales representative?
- A distributor generally purchases products and resells them at its own risk and profit margin, while a sales representative or agent sells on the manufacturer's behalf without taking title to the goods, typically earning a commission instead. The agreement should be structured to match the parties' actual intended relationship.
- Should I grant exclusive distribution rights in a territory?
- Exclusivity can motivate a distributor to invest in developing the territory, but it should generally be conditioned on the distributor meeting defined performance targets, with a mechanism to adjust or terminate exclusivity if those targets are not met.
- How do I terminate a distribution agreement with an underperforming distributor?
- Termination rights depend on the agreement's own terms, including any cure periods and performance-based termination triggers. Some jurisdictions also impose statutory protections for distributors upon termination, which should be reviewed for any territory outside Florida.
- Can a distribution agreement help a foreign manufacturer enter the U.S. market?
- Yes, appointing a Florida-based distributor is a common way to enter the market without immediately establishing a U.S. entity or sales team. Manufacturers planning an eventual direct presence should coordinate the distribution strategy with entity formation and, where a principal intends to relocate, immigration planning.
- What happens to unsold inventory when a distribution agreement ends?
- That depends on the agreement's termination provisions, which should specify whether the manufacturer will repurchase unsold inventory, whether the distributor may sell it off over a wind-down period, or whether the distributor retains it subject to continuing obligations.
Official sources
Consult the official sources above for current rules and procedures.