Two of the key ways to push into foreign markets are the use of agents and distributors. Each method relies on using the expertise offered by those who are already familiar with the market being targeted, but there is a fundamental difference between the two:
Agents
An Agent has the power to negotiate and conclude contracts for its principal (you) when dealing with another principal (your customer). Once you and your customer are in a legal relationship the agent is no longer part of the transaction. Therefore, as a general rule an agent is not a party to the contract between you and the customer – the agent acts on your behalf to negotiate and conclude a contract. This means that the customer is never a customer of the agent.
As agents are not a party to the contract with the customer you retain a lot more control in relation to price, quantity, promotions, etc., as opposed to if you are dealing with distributors. However, you also retain the risk in the products you are selling, as these never transfer to the agent – you sell directly to your customer. Payment to the agent is usually based on commission on sales made by the agent.
When dealing with agents it is important to be aware of the impact of Commercial Agents (Council Directive) Regulations 1993 and the rights the regulations pass onto agents. The regulations place onerous obligations on you when it comes to the termination of an agent’s contract and require you to pay a “compensation” or “indemnity” payment on termination.
Pros:
- Greater level of control
- Direct contact between you and the end-user
- Less risk of competition law issues
Cons:
- You retain the risk of the product not selling
- Agent must be paid on termination in line with UK law
Distributors
A distributor buys goods in its own right from you and contracts directly with the end customer. Therefore, the contract is between the distributor and the end user. The distributor makes their revenue on the profit derived from the difference in price between what it charges to the end user and what it has to pay to you.
Pros:
- Pass over risk in stock to the distributor
- A greater motivation to sell the goods
- Avoids the need to have an established place of business – reducing administrative costs
Cons:
- Less control of the activities of the distributor
- Greater risk of competition law issues arising
Appointing Agents and Distributors
Top tips
If you decide to take the plunge and appoint an agent or distributor, here are our top three tips to remember:
- Define the ‘territory’ – be accurate. Do not simply say ‘the Middle East’ or ‘North Africa’, specify the countries individually. Given Brexit, if the territory is the European Union do you mean the EU as it is now (i.e., including the UK) or how it may be in the future (with the UK leaving and perhaps new members joining)? Importantly, if the territory includes the EU, you must consider your obligations under the EU’s Commercial Agents (Council Directive) Regulations 1993 – which, as mentioned above, provides for “compensation” or “indemnity” payments to the agent on termination of the relationship.
- Decide whether it will be an exclusive or non-exclusive appointment – if the appointment is exclusive no-one else (including you) may market or sell your goods in the territory agreed.
- Agree sales targets – this helps incentivise. Targets are critical when the appointment is exclusive because you will not be able to appoint other agents or distributors in the territory agreed. Typically, you will retain the right to terminate the appointment (or at least make it non-exclusive) if sales targets are missed.
How Can Nelsons Help?
For further advice about appointing agents and distributors, please contact Emma Toes (née Ward) or a member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.