When deciding whether you should use an Agency versus a Distribution Agreement you think about the nature of the relationship between the parties: Principal-Agent or Supplier-Distributor?
Companies rely on Agents and Distributors for selling their products and services. Whilst Agents are not direct sales persons, Distributors are the direct salesmen of the products. As such, they are different in many aspects; primarily in stock holding.
An Agent acting for a company that sells widgets – will market, present and represent the widget manufacturer in the marketplace. Whereas a Distributor buys the widgets or stock from the manufacturer, and re-sells the product to the end user.
Agents, have actual authority (express or implied), to create legal relationships between another, known as a “Principal” (in the above case, the manufacturer) and third parties.
Agents are essentially campaigners of the products and are usually familiar with their market. As the direct connection to the customer, they must know their customer requirements well. Although, they are responsible for selling the products, they do not have any direct connection with the company. They do not buy the products directly from the companies and are not involved in the delivery or after sales / maintenance services. Agents are usually paid on a fixed commission for their work.
Moving on to Distributors, they have a direct connection with the company or “Supplier”. Unlike Agents, Distributors purchase the product directly from the company and distribute it in the market. Moreover, Distributors also provide after sales services, which the Agents do not provide.
While an Agent can be called the company’s representative, a Distributor cannot be called so, as he buys the product and then resells it. Agents can be direct employees of the companies or self-employed. On the other hand, Distributors are not employed. The legal relationship between the parties is therefore, totally different.
An Agent is responsible for finding the target people and negotiating with them to buy the product. Although they do not have the final word regarding sales; the last word is reserved to the company. Conversely, Distributors do not have any role in negotiating with the customers; they only perform the role of distributing the product in the market.
- Agents are not direct sales persons. Distributors sell the products direct.
- Agents are only responsible for selling the products.
- Agents are not involved in the delivery or after sales services. Distributors buy the products directly from the company, distribute it in the market and also provide after sales services, which the Agents do not provide.
- While an Agent can be called the company’s representative, a Distributor cannot, as he buys the products and then resells them.
- Agent are responsible for finding the target people and negotiating with them to buy the products. Distributors do not have any role in negotiating with customers; they only perform the role of distributing the product in the market.
- Think in the following terms:
- Agent = Representative
- Distributor = Customer
A Company’s Decision
A company’s choice between an Agent and a Distributor will depend on certain factors including; the market size, the type of product and the degree of control a company wants to exercise or is able to exercise in the market. As a rule, you should use an Agency Agreement when you are considering marketing the products of another company. Here are some other considerations:
1. Decide on whether the appointment of an Agent or Distributor is more appropriate in the circumstances.
2. Carry out research on local practices within the territory, if necessary, to help you decide.
3. Check local laws on the relative rights of Agents and Distributors, particularly on termination of the appointment.