Sole Distributor Agreement

One of the most popular types of small-business operations stems from a sole distributor agreement. A sole distributor agreement carries some significant advantages for both the manufacturer, including a high degree of product control, and the reseller, including a lack of competition. However, resellers must also be aware of the restrictions that such an exclusive agreement can impose on their decision-making processes.

The sole distributor agreement grants a small-business owner the exclusive right to distribute and resell a manufacturer's product in a specific territory. The manufacturer agrees not to allow any other firms to resell its products in the reseller's territory, while the reseller agrees not to sell any products that would compete with the manufacturer's items. Also, the reseller agrees to comply with the manufacturer's standards for pricing, marketing and promotion for its items.

Most sole distribution agreements involve small businesses that sell high-end luxury items, such as cars or jewelry. Some agreements involve specific technology applications, such as industry software packages. For instance, a reseller can sign on to a sole distribution agreement with a software developer to distribute its geographic information systems packages. These resellers can approach private firms, such as oil and gas exploration companies, and government agencies, such as urban planning offices, as the exclusive distributors of the GIS software.

The primary benefit for a small business in signing on to a sole distributor agreement is the lack of competition within the territory. Since most products sold under a sole distribution agreement are high-ticket items, the reseller also earns a level of prestige in the customers' view as the "exclusive distributor" of these items. The manufacturer also benefits from the lack of overhead in administering its distribution policies over only a single distributor in each territory.

A sole distributor agreement is not without its disadvantages. The reseller must comply with the manufacturer's policies in all of its operations regarding that product. The reseller may also not be allowed to sell a similar product to that offered by the manufacturer, even if the other product offers higher profit margins or has higher customer demand. The main disadvantage to the manufacturer occurs when the reseller's performance does not meet expectations, which can force the manufacturer to terminate the agreement and seek out a new distributor.