What is a Distribution Agreement?

A distribution agreement is one made between a manufacturer and a supplier to distribute and/or sell items manufactured. The supplier may make such an agreement with separate stores selling the product that involves how goods will be merchandised or how much supplies will available to the store. The agreement may also include terms regarding advertising of a product.

Generally the manufacturer pays a fee to enter into a distribution agreement with a supplier. However, a balanced agreement will provide opportunities to make money for both the manufacturer and supplier. Often the manufacturer makes the least money.

For example, a farmer may enter into a distribution agreement with a produce supplier. The farmer will get a price for his wares, the supplier will then sell the wares for a larger price, and the supermarket will charge still more to consumers who wish to buy the farmer’s products. Ultimately the three-tiered approach means everyone makes money, but the farmer makes the least.

In other situations profits may be more equally shared. Perhaps a director has made a film, and signs a distribution agreement with a studio to market and sell the film to theaters. Additionally, the agreement might include marketing and selling the film to video stores at a later point. Both the filmmakers and the distributors will make money from the arrangement.

Often studios make films, so distribution is already a responsibility of the studio. If the film is marketed in other countries, it may need to be distributed through a separate distributor and require an additional distribution agreement.

A distribution agreement may include the specifics of how long the distributor will work for a set price, and the specific way in which the goods will be distributed. Usually, these agreements are fairly long, so that the manufacturers know their goods have the best chance of reaching the largest possible market.

Some manufacturers choose not to use a distributor to disperse their goods. This may be the case when the inventory of goods is relatively small. For example, the farmer may have only a small farm, and may choose to sell his produce at local farmers’ markets instead of selling produce to distributors. He may pay a small fee for distributing his goods at local farmers’ markets, which is an informal distribution agreement.

However, the farmer who cuts out the distributor tends to make a little more on his produce because he can charge supermarket prices instead of the low prices expected by a distributor. In some cases, small businesses actually make more by “cutting out the middleman” and distributing goods on their own.