Differences between Agents and Distributors
OK, so you’re ready to have somebody else selling on your behalf “while you sleep”? Of course, there are various solutions to this, but two of the more common are the ’employment’ of commission (aka sales, aka trade) agents or distributors. But what are the differences between agents and distributors?
Essentially, the difference is one of product ownership. While a commission/sales/trade agent sells product on your behalf that you continue to own and invoice the ultimate customer for, distributors take ownership of the product and sell on to their own customers. This can mean that while, on the one hand, your business builds a relationship with the customer, on the other you may not even know where your product ends up.
The key point to remember when choosing between selling via agents or distributors is the following :
In the case of distributors, a supplier / manufacturer sells his product to the distributor, who in turn sells the product on to his customers, adding a margin to cover his own costs. Distributorships are used as a low risk means of expanding business into new markets or territories. The distributor assumes liability, i.e. legal responsibility for one’s acts or omissions. Failure of the distributor’s business entity to meet that responsibility leaves him open to a lawsuit for any resulting damages or loss, which may occur to the other party. As the distributor has taken ownership of the products, he is incurring a greater degree of risk than an agent in the course of his business. The distributor has no authority to create a contract between the supplier and customer. The customer’s contract is, in this case, with the distributor.
On the other hand, an agent is a self-employed intermediary who has continuing authority to negotiate the sale of goods on behalf of another entity – the supplier / manufacturer (aka the principal). The agent may negotiate and conclude the sale of goods on behalf of and in the name of that principal. As he does not take ownership of the goods, the agent does not take on responsibility. This remains with the supplier.
Here are some main differences between agents and distributors.
Distributor advantages :
- A supplier is able to pass on risk associated with the products.
- The distributor is motivated to sell the stock he has purchased from the supplier.
- A supplier will not incur any liability (with exceptions e.g. defective products).
- The appointment of a distributor will avoid the need for a supplier requiring an established place of business in the territory, reducing administrative costs.
- The supplier has avoided the cost of employing a salesperson in the territory.
- A supplier will only need to monitor accounts with a distributor.
- No compensation is automatically payable to a distributor upon termination of the distributorship agreement.
Distributor Disadvantages :
- The supplier has limited control over activities of a distributor.
- Under an exclusive distributorship arrangement, the supplier’s entire credit risk in respect of sales in that territory is concentrated on the distributor.
- A distributorship arrangement is likely to be governed by domestic and European competition legislation.
- The supplier lacks information on the ultimate customer – he who buys from his distributor.
- Given the large degree of autonomy granted to a distributor, it is critical that the selected distributor is financially and commercially sound.
- The supplier has more control over the activities of an agent.
- The financial and commercial background of the commission agent will not be as critically important to the principal.
- The principal will want to ensure the integrity of the sales agent, since the principal will in the normal course be bound by the actions of the sales agent. This can be more easily done, when dealing with one person, rather than a company, as with a distributor.
- The supplier keeps in direct contact with the customers.
- The principal is not able to pass on risk associated with the products to the agent.
- The principal will incur liability as a result of the agent’s activities.
- In most instances, the principal will be obliged to take on the expense of training the agent.
- The principal will still be obliged to monitor the accounts of all customers.
- An agent would normally carry several products from several manufacturers. If the supplier’s product is not selling well, the agent will typically divert more attention and energy to other products in his suite.
- Under EU Commercial Agents Regulations, minimum notice provisions apply in the event of termination of the agency and the agent may also be entitled to compensation, over and above this notice requirement.
While there is no right or wrong choice here (it depends on your industry and what choices you make for growth strategy), do take these differences between agents and distributors into consideration when plotting our next steps. Also, consider other factors in distribution agreements outlined in this blogpost.