Include Distributor Commitments: Suppose you and your distributor have set revenue targets or even minimum purchase amounts, otherwise you are entitled to terminate the exclusivity or the entire contract. In the real world, you cannot impose these sanctions as quickly. They are often subject to long grace periods, other conditions or both, so that they do not in fact give them any real guarantees. Therefore, it is very important that you conduct due diligence for your distributor and receive a detailed business plan. This business plan should at least include commitments with respect to marketing expenses and the details of human resources to be allocated to distribution. If you add an appropriate incentive to achieve revenue goals, you will gain some confidence in the fact that you have an appropriate, competent and motivated distributor. Another rather difficult provision, which we have seen in some distribution agreements, is that merchants are terminated if they do not meet some kind of standard measured by an “average”. This is a complex conceptual problem. An average is based on a range of turnovers, and the very definition of the average means that about half of the population will not meet it. Therefore, if the manufacturer does not want to lay off half of its distributors each year, it will be able to systematically meet the “You must sell at least as much as average commitments” requirement. It would be much better for the manufacturer and distributor to drop the standard on something that both parties thought would be respectable — maybe 10 or 15 per cent.
If the distributor is consistent in the bottom 10 percent of all players, chances are that the relationship is not particularly profitable for one of the parties, or that there are other serious problems, and that the relationship may have to be over. Dealer agreements that allow termination by a single partner are biased. Experience shows that such tilting agreements end more often with litigation. The possibility of both parties terminating the contract avoids certain disputes. The best distribution agreements allow both parties to terminate the contract. This table briefly highlights some of the most important questions you should ask yourself when designing or reviewing a distribution agreement. This is not a complete checklist, as distribution agreements can range from a very short mail-order agreement that simply allows a company to sell your products to complex, complex and complex multi-page international agreements.