Commercial Agreements: which one fits your company’s needs?

Many entrepreneurs reach out to the US market to sell their products, drawn – quite understandably – by its almost endless opportunities. However, when it comes to choose which kind of commercial agreement they should enter into with their potential partners, the final choice is often dictated by the wrong reasons, rather than involving a thought out process, pondering all pros and cons, before rushing into a relationship that may later on reveal itself as something that does not fit their needs and expectations.

For example, companies approaching the US market in order to sell their products, are often led into thinking that they can opt, almost interchangeably, between a sales representative agreement or a distribution agreement. In reality, those two agreements are very different, and structurally, fit very different needs.

Distribution Agreement: under a distribution agreement a company (generally the manufacturer) sells its products to a distributor, which in turn is reselling (distributing) them to buyers on the territory. Title to the goods will pass to the distributor (although specific covenants can be added to provide for the title to pass only if and when the products have been paid), meaning that the distributor is buying the goods before reselling them. Selling the products to a distributor generally means transferring part of the liabilities to it, while delegating the responsibility of developing a new market. The distributor will rely mostly on its on investments to develop the market. Clearly, selling the products to a distributor means that the manufacturer will – at least partially – forfeit some of the control over the prospective market, although specific clauses can be added to provide for added protection, such as exclusivity covenants, non-compete, marketing obligations, quality standards, after-sale assistance, etc.

Sales Representative Agreement: a sales representative is not buying the manufacturer’s product, but simply getting a commission out of the manufacturer’s sales. Since there is no transfer of title to the goods, and often the investment is minimum on the representative’s side, this is often the preferred choice for those companies willing to test a new market. However it may not be suited for those companies aiming at developing something more than just a sales force. Also, while a sales representative agreement can be “tuned” by including a whole range of clauses, such as sales quotas, exclusivity clauses, marketing and collection obligations, etc., the risk that a sales agent is taking is minimum, if compared to a distributor, and this can have an impact on its commitment and loyalty to the manufacturer.

Based on a company’s needs, desire to make a substantial investment in developing its US customer base, and knowledge of its partners, one of the two structures above can be chosen.

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