Agents and distributors are common features of commercial bodies. Their similarities and sub-types can lead to confusion, which can result in businesses being unclear on which they should opt for. We have laid down the key differences between the two and some factors to consider when deciding which model is best for your business.
An agent acts on behalf of the principal to negotiate or sell products on the principals’ behalf. Agents have no contractual liability to the customer; the only contractual relationship that exists is between the principal and the customer. Agents receive a commission based on the sales they make, typically through a percentage of the profits received through their sales.
Under a distribution agreement, the principal will sell their products to the distributor who then sells those products to the customer. In contrast to agents, this means that there is a contractual liability between the distributor and the customer. The title of the goods passes from the principal to the distributor, and then from the distributor to the customer. In reselling the products to the customer, a distributor will add on a margin to cover their own costs and profit.
Which one is best for me?
The suitability of an agency or distribution agreement will depend on a business’ specific circumstances and goals. However, some of the factors to be considered are:
- Risk – in a distribution agreement, the distributor will take on a greater degree of risk as they have a contractual liability to the customer, unlike an agent. As a principal, this may be an advantage as you are able to pass more risk to the distributor rather than keeping the risk with the business. In turn, the distributor may be more motivated to sell the products due to the higher degree of risk they face
- Liability – due to the separate contractual relationships, a principal is generally not liable for the distributor’s activities. However, under an agency agreement a principal will be bound by the acts of its agent because the agent is acting on behalf of the principal
- Control – there is more separation between a principal and a distributor compared to a principal and an agent. This means a principal will have less control over a distributor for example, with choices such as customers and marketing.
- Competition – a distributor is more likely to face issues with competition law than an agent. If there is a genuine agency under competition law, the activities of an agent will fall outside the restrictions in Article 101.
Other pros and cons to consider are:
|Can my business have…||Agents||Distributors|
|Control over pricing?||Yes||No|
|The ability to choose customers and ownership of customers?||Yes||No|
|The ability to manage marketing?||Yes||No*|
|Simpler Tax position?||No||Yes|
|What about commission – does one offer lower payable commission?||Yes||No|
|Will the business be liable for termination payments?||Yes||Not in the UK|
|The ability to off-load financial risk of consignment stock?||No||Yes|
*No, but other arrangements can be put in place such as marketing programmes being implemented
If you would like any further information on these, we would be happy to elaborate on these further and help you determine what may be best suited.
Agency and distribution can both be useful models in commercial transactions and choosing the right model for you is important. Understanding the differences and considering the above factors will put your business in the best position to determine which model is appropriate to take your business forward.