A distribution agreement is created through negotiations between distributors and suppliers on points such as assignment of territory, termination, annual renewal, exclusivity, frequency of price changes and responsibilities during and after the life of the agreement, notes management and forensic consultant Glen Balzer. Attorneys typically review distribution agreements before they are signed.
Territory assignment is an often heated point of contention between distributors and suppliers, notes Balzer. Distributors naturally want larger, more profitable territories. Suppliers are often reluctant to grant large territories to distributors until they have established themselves with the supplier. Balzer recommends suppliers start new distributors with smaller territories and offer to gradually expand the territory if the distributor's performance is satisfactory. Exclusivity is another hotly contested issue. Distributors often argue they need exclusive territories to appropriately allocate their resources.
As with large territory assignments, suppliers are reluctant to grant exclusivity to unproven distributors. Suppliers often refuse to grant exclusivity in writing but verbally agree to not engage another franchise in the territory if performance objectives are met. Balzer recommends giving both parties the right to terminate the agreement without cause to make the agreements equitable and reduce the risk of costly litigation. He also recommends the agreement allow for amendments at any time.