3 important factors to consider when negotiating your distribution contract

Today, I would like to share three factors to consider when you negotiate your distribution contract. If you need to negotiate a distribution contract with your supplier, I hope today's article will help you negotiate that contract well.

This article comes from my personal experience of negotiating contracts with suppliers. Of various types of contracts, I would deal with negotiating exclusive distribution contracts.

With further ado, let's get started.

1. Contractual area

It is most important to clarify where you can sell your products as a distributor. Your contract should specify the names of countries that you can operate, so that no legal dispute will arise later.

When determining your contractual area, you need to think about where your strength lies. Think about your current channels that you have been working with and determine where your most important market is.

Without clarifying where you want to work, you may have problems asking the supplier to expand your contractual area again and again. It will involve another set of time-consuming negotiation, and it won't be good for your business momentum.

An occasion might arise that you may get a product inquiry from a French customer even though you are selling your goods in the German market. They might want to work with your product in France, but it won't be possible if you have a right to distribute goods in France.

Then, you might lose a new business opportunity that comes to your doorstep if you don't have any right to distribute the goods in France. You need to know where your both current and potential markets are, so that you can timely expand your business when an opportunity comes.

As a distributor, you need to ask as many countries as possible so that you can build up your distribution business without friction. So, please plan out your business in advance as much as possible to know where you want to be.

2. Quality assurance

The second important factor is to assure the level of quality that the supplier would provide to you. This is important if you need to import your products.

Without meeting the regulations of your target markets, it may not be possible to import your goods in the first place. To prevent such an unfortunate situation, you need to specify the quality standards that the supplier should meet.

You need to do research on what kind of standards exist for your product category in your target market. You should also know whether it is mandatory to provide test results to sell them in your target market.

Without knowing about the regulations, it would be difficult to suggest standards that your supplier should meet. You should specify these conditions as much as possible so that your product can meet the standards of your market.

Please also think about what kind of compensation you want to receive if damage occurs due to the quality issue. You can specify the range of compensations that you want to receive like fees, marketing support, free products, etc.

3. Payment term

Payment term is also an important category to negotiate with your supplier since it determines you and your supplier's cash flow. It would be best for you to pay as late as possible to your supplier, but it would be the case that you need to make a compromise.

Your supplier would want to get your money as soon as possible since they need to pay for their expenses to produce your goods. They want to ensure that they would get payments for their efforts to create their products.

It takes a lot of manpower, raw materials, and energy to create products, and all these elements cost the supplier a lot of money. The supplier should pay for these expenses in advance to make products for you.

Depending on the situation, the supplier would take weeks to create products to fulfil your order. If they choose to ship those products via sea freight, it would take one or more months to deliver these goods to you.

So, if you pay for your goods after you receive them, your supplier has to wait for more than two months to receive their money. It is not good for their cash flow situation since they would cover for the costs upfront without money coming in from you.

Due to such a situation, your supplier would like to get a guarantee that you are sure to buy these products. They may ask you to pay a certain percentage of the total payment upfront so that they can cover a part of their production cost.

A common term would be paying 50% after receiving the order and paying the rest after they send the finished products to the port. You may need to adjust the percentage of the advance payment to suit your company's situation.

It might be okay to give some concession on payment terms for your supplier if you can get the rest of the contracts favourable to you. If you have a large contractual area with exclusivity, giving some advance payment to the supplier would be worth it.

Keep in mind that you need to insert some clause that you can renegotiate the payment term in the future. If your distribution business is doing well, you can ask for more favourable terms like T/T xx days, so that you can send money after you receive your goods.

4. Wrap-up

I hope today's article helped you understand more about what to take care of when you negotiate distribution contracts. Although there are other important factors like sales target, the three elements are important for you as a distributor.

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Thanks for reading, and I will see you in my next article.