Agency and distributorship: business briefing
This business briefing highlights the circumstances in which a business may want to engage the services of an agent or a distributor.
What is an agent?
An agent is an intermediary appointed by a business to negotiate and possibly conclude contracts with customers on its behalf. An agent is paid commission on the sales they make, usually on a percentage basis.
What is a distributor?
A distributor is essentially an independent contractor. In a distributorship arrangement, a business sells its products to a distributor, who then sells the products on to their customer, adding a margin to cover its own costs and profit.
Why appoint an agent or distributor?
- In appointing a selling agent or distributor, a business is effectively sub-contracting its selling function. The business may want to do this for a number of reasons, for example:
- to take advantage of an agent’s or distributor’s local knowledge and established trade connections; or
- to save the cost of having to establish its own sales operation.
- Always be clear about which arrangement is being used, as it is possible for a party to be both agent and distributor of different products under the same agreements (for example, a distributor in selling products but an agent for software relating to those products).
Why appoint an agent rather than a distributor?
There a number of situations where an agency arrangement may be preferable to a distributorship:
- If the business wants to retain greater control of the terms of sale of its products, in particular the price. Imposing resale price maintenance on a distributor is unlawful in most countries, but by selling through an agent the business can retain the freedom to fix its own prices for sale.
- If the business wants to restrict the agent’s freedom to choose the customers that they deal with. In most countries, there are restrictions on the extent to which a supplier can restrict a distributor’s choice of customer. However, by using an agent, a business retains the freedom to choose who to deal with and with whom the agent deals. Generally, fewer competition law issues arise with agency than with distributorship.
- Where the business wants to retain direct contact with its customer. For example, where it offers bespoke design work or highly specialised after-sales service that can only be effectively provided by the business itself.
- Where close control over marketing methods are important (for example, because brand image is a crucial factor for the business).
- If the business wants to retain the financial risk of stock (consignment stock with an agent would normally remain the business’ property).
- Typically, the commission paid to an agent is lower than the margin which a distributor will earn (since the distributor is taking a greater financial risk). Agency will therefore, in general terms, probably cost the business less than a distributorship.