Agents and Distributors: The Key Legal Considerations
Elizabeth Ward is the founder and Principal of Virtuoso Legal, the intellectual property specialist law-firm. In this piece Liz explains the key considerations you need to know when it comes to appointing an agent or distributor when growing business abroad. Liz also recently spoke on our recent webinar on how to get the most from working with overseas sales partners.
There are many important considerations that you need to make when appointing an agent or distributor as you look to expand your business overseas.
These individuals will be crucial to the successful growth of your business and the correct legal due diligence is utterly critical when it comes to these make or break appointments.
What follows are the key themes you need to look at before shaking hands on an agency or distribution agreement.
Agent versus distributor – what are the key differences?
Agency arrangements are quite different from distribution agreements on a number of fundamental levels. By way of example, an agent will merely take orders on behalf of the principal, and then transmit those orders for the principal to deliver the goods and services in question.
Distributors will also find clients, but when they do so they will arrange to provide goods and services directly from themselves.
In essence, this means that a distributor will keep stock of goods and should have a ready supply to satisfy any customers. Customers will deal directly with a distributor and will pay the distributor according to the distributor’s terms and conditions.
An agent, on the other hand, will be providing transactions only as directed by their principal. An agent will use the principal’s terms and conditions in order to take orders for goods and services.
Why choose an agent over a distributor?
First and foremost, agency and distribution arrangements should always be covered by a legal contract.
However, instructing an agent is a relatively inexpensive and efficient way of having sales staff in a territory without necessarily investing heavily in infrastructure or people. This is useful where goods can be delivered simply straight to a customer but is often more problematic where the customer requires immediate fulfilment of orders. An agent will pass the order onto its principal, whereas a distributor can often ensure that a customer has goods within a day or two of the order being placed. Of course, this requires the distributor to have a supply of goods at their location. It also requires the distributor to have the requisite logistics and in some instances sales staff to solicit orders from customers.
As with every international opportunity there are pros and cons to each given scenario. But the key deciding point is generally what the customer demands in terms of fulfilment. In a modern economy fulfilment is key. This is why many Chinese companies supplying to the UK have warehouses full of stock in order as 24-hour fulfilment using platforms such as Amazon and eBay are now viewed by consumers as an essential convenience.
It can also be useful to have a distributor in a locality when they supply a range of associated goods. So for example, if you sell bicycles then a local distributor can keep a supply of things such as bicycle inner tubes, handlebars and cycle accessories. This adds value to the end customer in that it means they can go to one point of supply for all their cycling needs.
Agents are more concerned with placing orders that will be fulfilled by the principal over a longer period of time and whether delivery to the end customer is not critical time-wise. Agents are often usefully deployed obtaining retail and wholesale customers to resell goods and services, whereas distributors will often deal directly with customers in a particular locality.
Agents can be useful for exploring new territories, especially if they already have expertise in your product. For example, an experienced agent who has sold one kind of heating system, may already have the relevant contacts and expertise to sell in another system or complimentary heating system. Once the market is established, distributors may also be appointed in a particular locality in order to supply customers directly with goods they require.
Geographical limitations in agency agreements can be difficult to enforce. There is often an overlap between one agent and another in terms of their geographic customer base. In distribution agreements, a distributor can have clients all over and it’s almost impossible to stop them from selling to particular locations.
What happens when things change?
A key consideration when discussing agency or distribution agreements is what happens if things change. It’s important to be able to walk away from agreements and to be able to discuss how the parties can go their separate ways over a period of time. It’s also vitally important to discuss with potential agents or distribution networks what it is they’re already involved with and how this may change over a period of time. For example, an agent may be already signed up with another company who come out with a product which challenges your product. The agent will then have to decide whose product or service they sell. This can also prove difficult.
Both distributor and agent should also have local knowledge of a particular market. A distributor may well already have the relevant local approvals for selling certain goods and services. For example, the distributor may be an approved part of the healthcare chain or supplier to a particular network. This can be hugely valuable to you as a supplier as such a distributor could be a highly strategic development in a particular market.
Agents are paid on their success which makes them particularly useful in new start-up markets, as it keeps overheads low. Distributors on the other hand may well wish to take free product up front to ensure that they have it in stock as and when it’s required by end customers. This can be costly for someone entering a new market. Distributors may also require the supplier to ensure that local certifications and approvals are complied with before they will take on certain goods and services. An agent would never normally be expected to obtain approvals and in most instances, they would expect the supplier to have already obtained all the relevant local knowledge in relation to the local supply of goods and services.
Good agents and distributors are difficult to come by. Time is well spent researching and looking into different opportunities in new markets and this includes looking into people who run effective agency or distribution models.
With all of the above being said, here are the main topics you should look to broach with your agents and distributors.
Competitor Behaviour and Market Conditions
The first thing you will want to do is understand the context of the market that you are going into. It is very unlikely that you will be entering an area where no one else is – so it’s prudent to get a lay of the land.
A great way of doing this is to get an understanding of what your competitors are doing in the area – which agents and distributors they are using, and what opportunities (and perhaps restrictions) you will encounter in the area.
You may find that there is a perfect distributor that your competitors have not tapped into yet – or you might find that the area is controlled by one or two incumbents who you will have to vie against with your rivals.
Achieving a pre-conception of the market you’re entering into is crucial to the success of such arrangements.
For an agency or distribution agreement to benefit both parties – it’s important to set and adjust targets for sales. This provides your contact with an indication of what you expect them to achieve under the terms of the agreement, and further benefits that might come from exceeding expectations.
Targets also provide a watermark that might need to be reached for the agreement to remain in force, allowing you to set a minimum requirement. If you do not set targets and you have a failing agent or distributor – you may find it more difficult to cancel your arrangement.
Agreement with agents and distributors often provide an opportunity to carve out a certain section of the market through exclusivity clauses. This can include things such a product exclusivity (wherein the agent or distributor is not allowed to sell similar products) or geographic exclusivity (wherein certain agents or distributors are limited in the regions where they can distribute the product).
There are many other ways in which you can include forms of exclusivity in your agreements – which can be of tremendous strategic benefit.
It is important to make sure that exclusivity is not given freely. It can be an incredible boon for a business partner to secure, so make sure it’s something they have to work hard to achieve through successive targets.
With key players, however, exclusivity can provide an incredible advantage against competitors – who will then find it difficult to make a meaningful impact on the market you’re operating in.
Obligations (Yours and Theirs)
Exporting is often a much more complicated business than it is taken for at first glance. There are many details that need to be considered when it comes to getting your widget from point A to the consumers’ hands in point Z.
During this process (and its ongoing maintenance) either you or your agent/distributor will need to be responsible for the widget’s transport and care until the point of purchase.
In this way it is important to set out what obligations both parties have in administering this process – and where responsibility is handed over. This might include determining who handles obligations such as: storage, transportation, marketing and much more – prior to a single item or service being shipped.
Leaving nothing unaccounted for makes for a clear and seamless process between yourselves and your business partner. This helps you focus on the task at hand, rather than raising question marks that might hang over the details of the process.
Motivations (Yours and Theirs)
When entering any serious business agreement, it is useful to take time to consider the motivations of the parties entering into the agreement. The best agreements are those that are truly mutually beneficial. One-sided agreements, as one might expect, always leaves one party less motivated toward its success.
If you want to motivate your business partner it’s advisable to make sure that success for you means success for them – and in a way that benefits both parties as meaningfully as possible. As a result, whether it is more favourable terms, exclusivity or access to more products, motivating your business partner on their terms can be one of the most critical inclusions in a distribution or agency agreement.
Maintaining oversight over and reporting on the success of a business agreement helps you understand what’s working and what is not working as well. What you learn from this feedback loop can then inform the support you might give to your agent or distributor.
Because of this, it is important to determine how oversight will be administered and how often you will hear from your partners about their success (or struggle) out in the field.
It goes without saying that payment is probably one of the most important areas that you will want to clearly determine within an agreement with an agent or distributor.
You will need to clarify: what, how, when and why both sides of the agreement get paid.
Things such as payment, schedule and currency, if not agreed clearly ahead of time, can torpedo a legal agreement, as business partners are not compensated in the way they expected.
Agreement Length and Termination
It is standard in any agreement to include terms relating to length (i.e. how long it is in force, and when it might be renewed) and termination (i.e. what exactly happens when things do not work out, and what circumstances need to be met for an agreement to end.)
Thinking long and hard about these are, without rose-tinted glasses, at the beginning of the agreement, ensures that if fulfilment is not up to snuff, you’re able to move on quickly and with as little negative impact to your business as possible in the interim.
Jurisdictional Considerations, Local Idiosyncrasies
Each market is not like the other. As such having your contact on the ground there can be invaluable in helping you understand what the local quirks are to trade in that country or area.
Learn as much as you can about the country your agent or distributor will be operating in, and how business works there. Doing so through visiting the area or outreach with other businesses in the area will give you an indication of the dos and don’ts to that particular area.
Intellectual Property Usage
IP forms an essential part of the value that is exchanged between parties in an agency or distribution settings. When entering a new market, you may be deploying a brand there for the very first time, exposing it to risk if it is not protected adequately. As such, it needs to be considered carefully in any agreement that is drafted.
First and foremost, you need to register your IP locally in the jurisdictions (and wider domain) where you will be deploying your brand through agents and distributors. If you do not, you risk ruin as others will quickly jump upon popular unregistered brands and register them. In many cases, countries operate on a “first to file basis” and not on first-to-use (e.g. China). This can be absolutely devastating and flip and exciting business growth opportunity into a catastrophe.
Sadly, it is often the case that those closest to an opportunity (even if it happens to be pulling the wool over their business partner’s eyes) are the ones who take it. It is not uncommon for agents or distributors to claim unregistered brands in jurisdictions where they operate.
As you expand so should the protection of your IP – and it is important to speak to IP lawyers to make sure that you are expanding your protection in a commercially optimal manner.
IP considerations also include databases of leads and clients that your partner will generate once business is underway. Ownership over these might be something that you wish to retain, or something you can use as a bargaining chip for other favourable terms you might be after.
Be careful to make sure that key IP is ring-fenced and deployed appropriately.
Finally, and perhaps most importantly, is to get a good gauge on the person that you will be working with. When it comes “down the crunch”, businesses are people and the success of your agreement is reliant upon your trust and ability to work fruitfully with the other side – come rain or shine.
Take your time to get to know your new business partner and be sure that they are compatible with your way of working.
Get it in (legal) writing
In all these instances, the best way to secure these attributes within a business is to do so in a legal agreement. These are the bedrock of the arrangement between you and your business partner – and should be comprehensively written to provide a cornerstone for your continued success.
As such, instructing a specialist solicitor to review, draft and finalise these agreements for you may be the most important move to make of all.