Business Law: Max Harnden on the different between a distributor and an agent
WHEN considering how best to market, sell or distribute your products you, as the principal, may want to appoint a distributor or an agent –but which is best?
A distributor retains the rights and risks of the contract which he will have with his customer on a re-sale.
It follows that the principal only has one customer, namely the distributor, and so he can assess the credit risk more accurately; therefore, the risks are not spread by having many customers.
Although it may be possible for the principal to recommend a re-sale price, the principal cannot retain control over prices. Neither will the principal have management or control over the customers and the terms on which the goods are sold. The distributor can, therefore, contract with the customer on his own standard terms and conditions.
The distributor will have more incentive to encourage sales as it will have invested time and money to purchase the product and therefore the dDistributor takes the risk of trying to maximise the sales.
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In an agency arrangement, your business appoints an agent to negotiate and possibly conclude contracts with customers on your behalf.
The agent is your representative and, as such, is an extension of your organisation. The agent is paid commission on the sales they make, usually a percentage.
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As the agent is only an intermediary, generally he is not a party to the contract between you and the customer. Your business will retain a greater degree of risk in relation to the activities of the agent than in a distributorship arrangement.
Your business will have greater control in an agency arrangement, which may be an important issue for certain types of products (for example, where brand image is crucial). However, as Principal, your business would generally be liable for the acts of the agent.
Careful thought from a legal and commercial prospective is required before setting up either a distributorship or an agency arrangement and putting in place clear agreements which properly reflect the intentions of the parties.
: : Max Harnden is a business law specialist and partner at Gotelee Solicitors.