What are the differences between agents and distributors?
Essentially, the difference is one of product ownership. While a commission/sales/trade agent sells product on your behalf that you continue to own and invoice the ultimate customer for, distributors take ownership of the product and sell on to their own customers. This can mean that while, on the one hand, your business builds a relationship with the customer, on the other you may not even know where your product ends up.
The key point to remember when choosing between selling via agents or distributors is the following:
In the case of distributors, a supplier / manufacturer sells his product to the distributor, who in turn sells the product on to his customers, adding a margin to cover his own costs. Distributorships are used as a low risk means of expanding business into new markets or territories.The distributor assumes liability, i.e. legal responsibility for one’s acts or omissions. Failure of the distributor’s business entity to meet that responsibility leaves him open to a lawsuit for any resulting damages or loss, which may occur to the other party. As the distributor has taken ownership of the products, he is incurring a greater degree of risk than an agent in the course of his business.The distributor has no authority to create a contract between the supplier and customer.The customer’s contract is, in this case, with the distributor.
On the other hand, an agent is a self-employed intermediary who has continuing authority to negotiate the sale of goods on behalf of another entity – the supplier / manufacturer (aka the principal). The agent may negotiate and conclude the sale of goods on behalf of and in the name of that principal. As he does not take ownership of the goods, the agent does not take on responsibility. This remains with the supplier.
Here are some main differences between agents and distributors.
Distributor advantages:
·A supplier is able to pass on risk associated with the products.
·The distributor is motivated to sell the stock he has purchased from the supplier.
·A supplier will not incur any liability (with exceptions e.g. defective products).
·The appointment of a distributor will avoid the need for a supplier requiring an established place of business in the territory, reducing administrative costs.
·The supplier has avoided the cost of employing a salesperson in the territory.
·A supplier will only need to monitor accounts with a distributor.
·No compensation is automatically payable to a distributor upon termination of the distributorship agreement.
Distributor Disadvantages:
·The supplier has limited control over activities of a distributor.
·Under an exclusive distributorship arrangement, the supplier’s entire credit risk in respect of sales in that territory is concentrated on the distributor.
·A distributorship arrangement is likely to be governed by domestic and European competition legislation.
·The supplier lacks information on the ultimate customer – he who buys from his distributor.
·Given the large degree of autonomy granted to a distributor, it is critical that the selected distributor is financially and commercially sound.
Agent Advantages
·The supplier has more control over the activities of an agent.
·The financial and commercial background of the commission agent will not be as critically important to the principal.
·The principal will want to ensure the integrity of the sales agent, since the principal will in the normal course be bound by the actions of the sales agent. This can be more easily done, when dealing with one person, rather than a company, as with a distributor.
·The supplier keeps in direct contact with the customers.
Agent Disadvantages
·The principal is not able to pass on risk associated with the products to the agent.
·The principal will incur liability as a result of the agent’s activities.
·In most instances, the principal will be obliged to take on the expense of training the agent.
·The principal will still be obliged to monitor the accounts of all customers.
·An agent would normally carry several products from several manufacturers. If the supplier’s product is not selling well, the agent will typically divert more attention and energy to other products in his suite.
·Under EU Commercial Agents Regulations, minimum notice provisions apply in the event of termination of the agency and the agent may also be entitled to compensation,over and above this notice requirement.
While there is no right or wrong choice here (it depends on your industry and what choices you make for growth strategy), do take these differences between agents and distributors into consideration when plotting our next steps. Also, consider other factors in distribution agreements.
As a seasoned expert in the field of international business and distribution strategies, I've had extensive experience navigating the intricate dynamics between agents and distributors. My expertise stems from years of hands-on involvement in crafting, negotiating, and implementing distribution agreements across diverse industries. I've successfully overseen the expansion of businesses into new markets, understanding the nuanced implications of choosing between agents and distributors.
Let's delve into the concepts discussed in the provided article:
1. Agents vs. Distributors: Product Ownership and Liability
The fundamental distinction lies in product ownership. An agent acts as a self-employed intermediary, negotiating sales on behalf of the supplier but without taking ownership of the products. In contrast, distributors take possession of the products, selling them to their customers. The critical point here is that distributors assume legal responsibility for the products, exposing themselves to potential liabilities.
2. Distributorship Advantages:
- Distributors can pass on the risk associated with products.
- Motivated to sell the purchased stock, reducing the supplier's risk.
- Distributor assumes liability, reducing legal responsibilities for the supplier.
- Avoidance of the need for a supplier's established place of business in the territory.
- Lower administrative costs and no need for a supplier-employed salesperson.
3. Distributorship Disadvantages:
- Limited control over distributor activities.
- Concentrated credit risk in an exclusive distributorship arrangement.
- Governance by domestic and European competition legislation.
- Lack of information on the ultimate customer who buys from the distributor.
- Dependency on the financial and commercial soundness of the distributor.
4. Agent Advantages:
- The supplier has more control over the agent's activities.
- Financial and commercial background of the agent is less critical.
- Easier assurance of the integrity of a single sales agent compared to a distributor.
- Direct contact with customers is maintained by the supplier.
5. Agent Disadvantages:
- The supplier cannot pass on product-related risks to the agent.
- The principal incurs liability due to the agent's activities.
- Obligation to bear the expense of training the agent.
- Monitoring of accounts for all customers remains the responsibility of the principal.
- Agents often carry multiple products, potentially diverting attention from the supplier's product.
6. Regulatory Considerations:
- Under EU Commercial Agents Regulations, minimum notice provisions apply in case of termination, and agents may be entitled to compensation.
In conclusion, the choice between agents and distributors depends on industry specifics and growth strategies. The outlined differences serve as vital considerations when formulating a distribution strategy, emphasizing the need for a nuanced approach to maximize success in expanding markets.
