If you own a small business that makes a product or products, you may have contemplated finding other companies or individuals to help distribute your product. Doing so can provide huge upside potential of increased sales, increased market share and a competitive advantage. However, you have to make sure that the distributor you decide to use has the capabilities needed to give you the upside you are looking for. Moreover, the main key in your relationship with a distributor is the contractual agreement you put in place.

In essence, the key to your relationship with the distributor is the Distribution Agreement. If you are dealing with a seasoned distributor or a large organization, such distributor will probably push to use their standard contract. This is not a deal breaker. You should absolutely work with counsel to review the distributor agreement if using their form or help you put a standard form together for this type of arrangement. In either situation and whether working with an attorney or not, you should consider the following key terms during the negotiation of a distribution agreement:

Exclusive or non-exclusive

First and foremost, you will need to address whether the distribution arrangement is exclusive or non-exclusive. In other words, does the distributor have the exclusive right to sell your product in a certain territory (which we will discuss next) or is the right non-exclusive, meaning other distributors may be competing in the same territory to sell the same product. This is something you need to think carefully about. You may not want to give exclusivity until the distributor proves themselves or have met certain sales goals.

Territory and market

The distribution agreement should clearly describe the distributor’s territory or business area in which they will be able to market and sell your products. The agreement should define the market in as much specificity as possible to avoid any confusion over territories down the road. In addition to territory, the distribution agreement can also segregate markets by customer. For example, you may want your company to handle certain major customers directly and have the distributor handle other outlets, which may be in the same geographical location. This will need to be clearly defined.

Representations and obligations of the distributor

The distribution agreement must clearly define what the distributor’s obligations are, as well as what they are representing to do in the arrangement. In most case, you want to set for that the distributor must use its “best efforts to market your products,” as well as state some specifics as to what constitutes best efforts. This list should be a non all-inclusive list.

Trademarks and independent contractor

The distribution agreement should prohibit the distributor from using the company’s name, trademark, and logos in advertising, marketing and sales activities, except as provided in the agreement or with the company’s prior written consent. This restriction ensures that your company’s goodwill, reputation and brand name are not damaged by the distributor’s activities. Further, you should include a clause stating that the distributor is an independent contractor of your company and cannot bind your company, except as set forth in the distribution agreement.