Very often, the shortcomings of a distributor agreement are not apparent until the point a distributor relationship deteriorates. When this happens, years of accumulated profit could be thrown out of the window.

Therefore, when drafting and approving the distributor agreement, ensure that:

The agreement is written in a balanced style, providing unfair advantage to neither party.

The best agreements integrate the recognition of balance into the agreement. Why balance? When a distributor feels neither subservient nor superior to the manufacturer, both parties apply energy to mutual objectives: expanding sales, improving market share, driving manufacturing margin for the manufacturer, pushing gross margins for the distributor, and growing the number customers. When a distributor believes that the relationship and agreement with a suppler is well balanced, the mutual objectives shared at the creation of the distributor agreement have a chance of success. Balance does not guarantee success, but a lack of balance almost certainly guarantees failure of the relationship. So, make sure both parties are on an equal footing in the relationship right from the very beginning.

The agreement should be compared to several other agreements used within the same industry in order to make certain that no standard features are omitted.
During the operating life of a distributor agreement, omissions in the agreement might be conveniently ignored. Why? Sales are growing and profits are growing even faster. Very often, it is only at the termination of the agreement that some omissions become obvious. An easy way to ensure that routine agreement clauses are not omitted is to perform a comparison between the proposed agreement with several live agreements found within the same industry. Be sure to take time to gather a representative sample of agreements and do in-depth research before approving and signing that next distribution agreement.

The two most important points in a distributor/supplier relationship are balance and trust. Distributor agreements must promote balance between the power of a distributor and manufacturer. Clever wording in an agreement that stacks more power toward one partner relative to the other ultimately erodes trust. When trust is questioned, neither party will work hard toward achieving the goals of the partnership. Performance excels and flourishes where trust is nourished and allowed to thrive. An unbalanced agreement draws energy away from sales and growth performance, and toward issues of compliance with the terms and conditions of the agreement, which can have a negative impact in the long run.
An objective in common for both the distributor and the supplier is leverage. The distributor, with the addition of a new supplier, has a greater product line to sell to its customers. This expanded product line affords the distributor to become increasingly important to its customers. The distributor benefits from the advantage of selling more products to its existing customers with the same sales team. The supplier, with the addition of a new distributor, enjoys more people selling its products. The supplier benefits from the advantage of an expanded sales force selling the same product line. Both the distributor and the supplier exploit the power of greater sales without greater cost.

Understand the life cycle of relationships
Relationships between distributors and manufacturers are organic. Those relationships are born, often of highly enthusiastic parents with immense expectations. The relationships grow and develop during a time when they are in a period of great change. The relationships later mature as growth slows down. Once growth ceases and sales begin to slow, relationships begin to decay and maybe even die. People managing relationships between suppliers and distributors recognize this organic analogy. Sales executives and managers who are new to relationships involving distributors and manufacturers need to understand this life cycle of relationships. Knowing where a manufacturer and a distributor are in their life cycle is very helpful in understanding the relationships being formed when the distributor agreement is signed.

It is also important to remember that words in a distributor agreement rarely extend the life of a relationship between a distributor and a manufacturer. However, properly constructed words and clauses in an agreement can make life easier for all involved during the lifetime of a distribution agreement. When the time comes to terminate the relationship for any of dozens of reasons, parting company without a legal skirmish allows both the distributor and the supplier to continue to focus time and energy on customers and not in courtroom or arbitration battles. Understanding your agreements and going into the relationship with your eyes wide open, will help the relationship, and prevent heartache, loss of time and revenues at the end of the day.