How to decide whether to use an agent or a distributor to grow your start-up business
If you are either starting up or scaling up your business (particularly in a new territory or market), you may want to consider first appointing an agent or distributor to promote and/or sell your goods and/or services, in order to gain entry into a market, drive sales or gain recognition for your brand. In addition to agency and distribution, you may have already considered options such as a joint venture, or franchising as your channel, as well as direct sales and online presence.
In this blog we’ve outlined the legal distinctions between, and commercial benefits and drawbacks of appointing agents or distributors to help you make your decision about what works best for your business. In the context of this blog, you can identify yourself as the supplier.
What's the legal difference between an agent and a distributor?
In broad terms, one party (the principal), appoints another party (the agent) to introduce customers to the principal and/or to make direct sales on the principal’s behalf. In doing so, the agent is given authority to negotiate (and sometimes) enter into contracts on behalf of the principal, usually in return for a commission on the sales concluded through the agent’s efforts. Legal ownership of any products concerned does not pass to the agent, and legally, each customer’s contract is with the principal not the agent. Therefore the principal assumes legal and commercial risk whereas an agent (normally) does not.
A distributor is essentially a purchaser of the supplier’s products, which it then sells on to end-user customers. Legal ownership to the products concerned passes to the distributor and it, not the supplier, has the contractual relationship with any customers.
Key characteristics of agency vs distribution
Although agency and distribution have the same commercial objective (i.e. to sell a supplier’s goods and/or services to customers), their structure and legal effects differ.
|Products / Services||Products / Services||Products|
|Sells on whose behalf?||Principal's||Distributor’s|
|Sells in whose name?||Usually the principal’s, creating a contractual relationship between the principal and each customer||Distributor’s|
|Exclusivity||Agency agreements may contain exclusivity clauses, but consideration should be given to competition law.||Distribution agreements may contain exclusivity clauses, but consideration should be given to competition law.
||Usually variable commission by results, or a fixed fee.||Profit generated by the distributor on the sale of goods or services purchased from the supplier. The distributor often receives a discounted price from the supplier to improve their margin.|
|Contractual relationship with customers||Principal||Distributor|
|Responsibility for pricing and terms of business||Principal||Distributor. The supplier would not normally control pricing.|
|Risk of unsold products||Principal||Distributor|
|Liability for acts of the agent/distributor||Principal (other than in limited circumstances)||Distributor|
|Liability for defective products||Principal||At a glance, the distributor, however in practice the distributor will usually require contractual rights against the supplier.
Legislation may also impose liability on the supplier/ manufacturer. For example, strict liability for any defects that causes injury.
|Liability for payment on termination of the arrangement (UK)||EU / UK based agents selling goods are entitled to statutory compensation on termination, unless termination is for convenience or due to their default. Agents promoting services do not enjoy the same protection.||No liability for the supplier unless the distribution agreement so provides.|
So which is preferable?
Agency may be preferable when the principal/supplier wants or needs to:
- retain greater control of the channel to market and customer relationships (e.g. with major customers) as the principle retains control of the contractual relationship with the customer and may have a direct relationship with the customer for after sales services;
- reduce cost — an agent’s commission may be less than the discount a distributor may require, to reflect the degree of risk assumed by the distributor; and
- incentivise its contractor — an agent earning commission on sales may be more motivated than a distributor.
However, it can be difficult to control the agent’s day-to-day activities and to make sure that they continually work hard on your behalf. The agent has a degree of legal authority to bind the principal and could incur liability for the principal. Also, on termination of the agreement, agents can be entitled to compensation even if they breached the agreement.
Distribution may be preferable when the supplier wants or needs to:
- mitigate the cost and risk of expanding into new products or territories;
- use the distributor’s name and/or experience (of products/support or market/territory) as a positive factor in selling;
- to avoid the administration of multiple customer relationships for particular products/markets, and to have only one, with the distributor.
Note that a supplier will have less control over the activities of a distributor than it would an agent and is unlikely to have a direct relationship with the end-user customer.
Whatever you decide is best for your business objectives and plan, ensure that you have the full facts about the legal and commercial impact, as your supply chain and channels are vital to your growth and ultimate success.
Please contact the Trowers’ team for more information. We have also produced a series of fact sheets to help you, so click here to access our online resources.