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Expanding into new territories - should you appoint a distributor or an agent?

Agents and distributors offer a relatively low-risk, cost-effective means of expansion into new markets. Lyndsay Gough explains the legal and practical differences and the advantages and drawbacks of each relationship.

If you are seeking to expand sales in the UK or overseas, the appointment of agents or distributors can offer a relatively low-risk, cost-effective alternative to establishing a new business in an additional territory.

There are, however, important legal and practical differences between a distributor and an agent, and before deciding which route to take, you need to be aware of the advantages and drawbacks of each relationship.

Appointing distributors and agents can be a mutually beneficial means of sub-contracting elements of the sales function of a business. Using the established trade connections and local knowledge of an independent individual or company in new territories or markets, fresh sales and marketing channels can be exploited without the costs and difficulties associated with setting up a new sales office or overseas business.

What is the difference?

Often the terms 'agent' and 'distributor' are used interchangeably, although there are distinct legal differences between the two arrangements. Both structures can be on a 'sole', 'exclusive' or 'non-exclusive' basis.

A distributor buys products on his own account and sells them on independently at a profit. In a distributor relationship the supplier sells his products (usually on discounted terms) to the distributor, who then resells the products direct to his own customers, applying a mark-up to cover his own costs and a profit element. There is one contract for the sale of goods from the supplier to the distributor and then another between the distributor and the customer. The supplier has no direct contractual relationship with the final customer and the distributor bears the risk of those customer sales.

An agent, in contrast, does not buy the products himself, but introduces customers to the supplier. In an agency relationship, the agent does not usually enter into contracts with customers himself, but simply acts as an intermediary between the supplier (known as the 'principal') and the supplier's customers. Generally the supplier, as principal, contracts direct with customers introduced by the agent and the acts of the agent are treated as those of the principal. Usually the agent will act only as an introducer or 'marketing agent', with no authority to negotiate or conclude contracts. Some 'sales agents', however, do have full power to negotiate and conclude contracts, effectively standing in the principal's shoes. Typically the agent will assume no financial risk, but receives commission on the sales he has introduced to the principal as a reward for his efforts.

Advantages and drawbacks of each relationship

A key advantage of the distribution model is that the supplier passes a significant degree of risk to the distributor, who is responsible for customer debts and contractual liabilities to those customers. The supplier deals just with the distributor and not the end customers, thus administrative costs are reduced and the need to have an established place of business in the distributor's territory is removed.

In a distribution arrangement, however, the supplier will have significantly less control over the activities of a distributor (who may even have other conflicting commitments) than over those of an agent. There is no direct relationship with the customer and the supplier. Credit risk in a particular territory will be concentrated in perhaps only one distributor, rather than in multiple customers. In addition, there are potential competition law implications of certain distribution agreements, which are less of a problem in an agency relationship.

The agency model is particularly beneficial where the supplier wishes to retain a higher degree of control over product sales, allowing the supplier to fix sales prices, which is usually unlawful in a distribution arrangement, and maintain closer control over brand image. The supplier can cultivate direct relationships with customers, particularly vital where the products are supplied on a bespoke basis or where specialised after-sales services are required.

A key draw back of an agency arrangement, however, is that the agent may have the statutory right to a lump sum payment on termination of an agency agreement. This arises in many countries, including the UK under the Commercial Agents (Council Directive) Regulations 1993, and in most of the EU, even if the agreement is terminated lawfully. There are complex provisions for 'indemnity' or 'compensation' payments in this context.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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