Supply chain · 23 April 2018

What is the difference between an agent and a distributor and which is best for your business?

Agents and distributors are often referred to interchangeably, but there are crucial differences

Grid Law founder David Walker returns to explain the difference between an agent and a distributor before guiding company owners on the most suitable arrangement.

If you want to grow your business and increase sales, you have a choice. You can either try to do everything yourself, or you can outsource the task by appointing an agent or distributor.

For an ambitious small business that wants to grow as fast as possible, appointing an agent or distributor has some clear advantages. For example, agents and distributors are likely to have an established network of contacts and potential customers ready to sell your products and services to. This can fast track your growth as it means you don’t have to spend time developing and nurturing these relationships yourself.

So, assuming this is what you want to do, what’s the difference between an agent and a distributor?

The terms “agent” and “distributor” are often used interchangeably but, from a legal perspective, their roles are very different.

A distributor buys products from you. They do this with the intention of selling them on to their customers at a profit. An agent doesn’t do this. Agents make introductions and referrals of potential customers to you. You then sell your products directly to these customers and pay the agent a fee or a commission for the introduction.

This means the distributor will be accepting more risk. They will be buying stock from you so will need premises to store it and all the necessary facilities and resources to sell it on again. Also, as they are purchasing the stock from you and there may be a delay before they resell it, they will have to carefully manage their cash flow.

Because of this extra risk, distributors will expect to make more money from selling your products than an agent. The distributor will want to buy your products at a wholesale price or at a considerable discount so that they can sell them on at a healthy profit.

Agents don’t have the same risks as distributors so they’re generally not as well compensated. The agent’s fee or commission is usually less than the profit the distributor will make.

Another significant difference between an agent and a distributor is the rights they have when their relationship with you comes to an end. Distributors generally don’t have any rights other than those set out in their contract with you.

Some agents, on the other hand, have much greater protection from legislation known as the Commercial Agent Regulations.

There are specific circumstances when the Commercial Agent Regulations apply and not all agents are covered by them. For example, to be protected, the agent must be a commercial agent. They must be selling products, not services and they must be operating within the European Economic Area (EEA). (As a side note, it’s still unclear what is going to happen to the Commercial Agent Regulations after Brexit, so watch this space.)

If the Commercial Agent Regulations do apply, you have to give the agent a minimum amount of notice to terminate the agreement, depending on how long they have worked for you. They may also be entitled to compensation when the agreement comes to an end.

Taking into account the differences between an agent and a distributor, which is best?

There are no right or wrong answers here. It’s a personal choice depending on your circumstances.

If you want minimum risk and are prepared to accept less profit from the sale of your products, you’re probably better off appointing a distributor. However, appointing a distributor does not completely eliminate all of your risks. For example, you could still be responsible for product liability claims if there were any faults with your products.

If you want to maintain control over the marketing and pricing of your products and have the relationship with the end customer, then appointing an agent is likely to be your better option.

This is an area of law where I frequently see disputes. Especially when the supplier thinks they have appointed a distributor, but the “distributor” thinks they’re an agent and tries to claim compensation when the relationship comes to an end.

Sometimes the distributor can also be an agent. For example, they could be a distributor selling a product, but an agent when they’re selling a follow up service that’s complementary to it.

Disputes in these circumstances can become extremely complex so this is one of those situations where I strongly recommend that you take professional advice. It’s essential that you’re properly protected and have a legally binding contract in place.

If you have any questions about appointing an agent or a distributor, please feel free to email me at editors@businessadvice.co.uk and I’ll happily answer them for you.

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

Q&A

If you’ve found the article above useful, but have a more detailed and bespoke question, then please feel free to submit a query to our expert. We at Business Advice will get in contact with them on your behalf and arrange for a personalised response. These questions and answers will then be collated on the site for any other readers who have similar queries.

Ask a question

KPMG