If your business makes products, you are considered a supplier. To sell your products, you have the option of engaging a distributor or reseller. In these cases, you’ll need either a distribution or a reseller agreement. You can also sell products directly to customers yourself by entering a supply agreement with each customer. This article explains the advantages and disadvantages of each option, plus the supply, distribution or reseller agreement you’ll need.
Engaging a Distributor
A distributor purchases products from a supplier and sells the products to retailers. However, unless agreed upfront between the distributor and the retailer, a distributor’s relationship with a retailer will not be exclusive. Therefore, the distributor can distribute products to multiple retailers. Furthermore, some distributors may offer additional services such as product marketing and managing customer relationships.
Engaging a distributor has several advantages, including:
- they can market your products and manage customer relationships;
- they can introduce your new products to multiple retailers;
- distributors have a larger customer base;
- it’s easier to distribute your products internationally; and
- distributors purchase and hold your stock, so they have an incentive to sell your products.
However, the costs for engaging a distributor are generally higher than a reseller because of the infrastructure costs to warehouse and sell your products. Therefore, if you’re at the start of the business lifecycle, it may not be cost-effective to engage a distributor.
The Distribution Agreement
Before entering into an agreement with a distributor, you should have a distribution agreement drafted or reviewed. This is a legally binding agreement between a distributor and your business that defines the relationship. It also sets out the rights and obligations of both parties. The distribution agreement will include:
- what products are to be supplied and distributed;
- whether the distributor has exclusive rights to distributing the products;
- how products will be delivered;
- how payments will be made; and
- restrictions on distributing competing products.
Hiring a Reseller
Similar to a distributor, a reseller sells your products to customers. However, the main difference between a distributor and reseller is the lack of warehousing. Resellers won’t purchase or hold your inventory. Instead, they’ll take a commission of the sale price when customers purchase your products through the reseller. Therefore, resellers act as an intermediary that connects your business with buyers who want to purchase your products.
Hiring a reseller has several advantages, including:
- they cost less than a distributor;
- resellers provide a cost-effective option for products that already have a strong brand presence; and
- the ability to sell your products with multiple resellers without exclusive rights restraints.
However, disadvantages of hiring a reseller include:
- increased holding costs for your business because the reseller does not have the physical premises to hold your stock;
- resellers have a lower incentive to distribute your products when compared to a distributor because they take a commision of the sale price instead of purchasing and holding your products; and
- increased inventory risks for your business.
The Reseller Agreement
Before hiring a reseller, you should have a reseller agreement drafted or reviewed. The reseller agreement is a legally binding contract between you and the reseller. It will include:
- pricing and payment terms;
- delivery terms;
- what warranties you will provide and liabilities you will exclude;
- the term of the agreement and how to terminate the agreement;
- intellectual property protection terms; and
- marketing terms and reselling terms.
Selling Directly to Customers
The third alternative — or in addition to engaging a distributor or reseller, is to sell your products directly to customers. An example of a supplier that covers the whole supply chain is Apple.
Selling directly to customers has several advantages, including:
- taking a greater share of sale revenue;
- controlling the brand and product marketing quality; and
- the ability to maintain your supply chain.
However, the disadvantages of selling directly to customers include:
- increased costs from controlling all stages of the product lifecycle;
- you may have less marketing resources than a distributor or reseller;
- a customer base must be developed from scratch; and
- increased costs in establishing international distribution channels.
The Supply Agreement
Before supplying your products directly to customers, you should have a supply agreement drafted or reviewed. This is a legally binding contract between you and the customer that sets out the rights and obligations of each party. It also reduces the potential for expensive legal disputes.
A typical supply agreement will include:
- what products will be supplied;
- payment and delivery terms;
- your customer’s obligations;
- limitation of your liability;
- the term of the supply period and how the agreement can be terminated; and
- protection of intellectual property and confidential information.
However, unlike a distribution or reseller agreement, a supply agreement must be agreed to by every individual customer. Therefore, it is usually included with the product itself. If selling online, the supply agreement is often linked to a checkbox that the customer must tick before purchase.
As a supplier, you have three options to get your products to market — engaging a distributor, hiring a reseller or selling directly to customers. Each option has its advantages and disadvantages. Once you make your choice, you should then have the correct legal document to manage the relationship. For example, a reseller agreement if engaging a reseller.
If you need assistance with your distribution, reseller or supply agreements, call LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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