Reseller Agreement vs. Distribution Agreement in the US and Mexico
By: Dieter Deutzman from Wardenclyffe, Inc.
The terms “reseller” and “distributor” in both Mexican and US legislation are often used interchangeably to describe entities that seek to acquire goods or services from a manufacturer or supplier and then distribute or resell said goods or services to retailers and consumers. However, there are many key differences when defining a distributor, a reseller, and important issues to consider in the agreements to be made with the various resellers and distributors.
A distributor is one who acts as a tacit partner of the manufacturer and is generally the first in line of the distribution channel and is associated with the direct manufacturer. A highly solid relationship with the distributor is excellent for new companies that have not been able to establish national or international recognition of their commercial brand within the market that they have addressed. The distributor generally buys directly from the manufacturer so it makes it more commercially attractive and is the one who maintains an inventory of the product, provides after-sales services, and resells the product to resellers associated with it and, sometimes, directly to end-users depending on the relationship with the distributor. Because distributors generally bear all direct marketing responsibilities for the distributed product, or the obligation to obtain regulatory or governmental approvals for the resale of the product, the manufacturer-distributor relationship is often an exclusive relationship. Therefore, an exclusive distribution agreement must be taken into consideration when negotiating minimum sales or minimum royalties so that the distributor maintains its exclusivity with the company. In addition to the above, because a distributor can be the first line of introduction of a product or service to the market, it is important for a company to find a distributor that diligently and freely markets its products, that has the appropriate connections in new territories to obtain necessary regulatory or governmental approvals for its products and to have a greater scope within the services. Incorporating an explicit commitment from the distributor not to sell competitor products can be of great use toward maintaining the exclusivity of the distributor.
A reseller is generally less associated and sometimes does not have a direct relationship with the manufacturer, as they generally purchase products from distributors. Resellers generally do not maintain an inventory of sales products and do not provide after-sales services as in the case of a dealer. Resellers generally only sell to end-users or wholesalers. For a manufacturer with an established and well-recognized product, a reseller relationship may be the most profitable because resellers invest less in developing the product’s market and thus provide higher profit margins for the manufacturer.
Any agreement with a reseller or distributor must be properly documented and reviewed by an experienced contract attorney to ensure that all relevant issues for such agreements are properly and promptly addressed, including, to name a few, obligations to legal compliance, marketing obligations, exclusivity, confidentiality, acceptance and payment methods, and compensation.
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