Agency agreement vs distribution agreement: choosing the right sales structure

An agent sells on your behalf and you keep the customer relationship. A distributor buys and resells independently. The choice has major tax, IP and liability implications.

Agency agreement vs distribution agreement: choosing the right sales structure

Expanding into a new market through a third party is standard practice. The structure you choose — agency or distribution — fundamentally changes your legal exposure, your tax position and who controls the customer relationship.

Agency agreement

Under an agency agreement, the commercial agent solicits orders on your behalf. The contract is between you (the principal) and the end customer. The agent earns a commission; title to goods never passes to them.

Key characteristics

• You control pricing and terms.
• You bear the credit risk (the customer owes you, not the agent).
• You own the customer relationship and the customer data.
• The agent is entitled to a goodwill indemnity (EU Commercial Agents Directive 86/653) when the relationship ends — typically up to one year’s average annual commission.

What an agency agreement must contain

1. Territory and exclusivity — where the agent can solicit and whether you can sell or appoint other agents in that territory.
2. Commission rate and calculation — percentage, which transactions trigger commission (concluded vs. performed), when commission vests and when it is paid.
3. Minimum activity obligations — number of customer visits, pipeline reporting.
4. Product and pricing authority — whether the agent can negotiate prices within a band or must use list price.
5. Termination notice — EU law mandates minimum notice periods scaling with contract length (1–3 months).
6. Goodwill indemnity or compensation — whether you pay the EU-mandated indemnity or the alternative compensation method (UK/Irish model).

Tax note

Commercial agents are typically self-employed. Misclassifying an employee as a commercial agent (or vice versa) creates significant employment-tax exposure.

Distribution agreement

Under a distribution agreement, the distributor buys your products and resells them under their own commercial risk. The contract is between the distributor and their customers — you never appear in that relationship.

Key characteristics

• The distributor sets their own resale price (subject to competition law; imposing a fixed resale price is a hard-core restriction under EU competition rules).
• The distributor carries the inventory and credit risk.
• The distributor owns the customer relationship and data.
• There is no statutory goodwill payment on termination (unlike agents).

What a distribution agreement must contain

1. Products and territory — exact product lines; geographic scope.
2. Exclusivity — exclusive, non-exclusive or sole distribution; online sales carve-outs.
3. Minimum purchase obligations — annual volume commitments; consequences of shortfall.
4. Intellectual property licence — right to use your trademarks and brand assets; restrictions on sub-licensing.
5. Pricing and margins — your list price to the distributor; rebates; pricing freedom for resale.
6. Returns and warranty — who handles defective products and customer warranty claims.
7. Termination — notice period; buy-back obligation for unsold stock.
8. Non-compete during and after — restrictions on distributing competing products.

Competition law caution

Both agency and distribution agreements must comply with EU competition rules. Hard-core restrictions — fixed resale prices, absolute territorial bans — can void the agreement entirely and trigger fines. Always verify compliance for exclusive distribution arrangements.

Which structure to choose?

| Factor | Agency | Distribution | |---|---|---| | Price control | You control it | Distributor sets resale price | | Credit risk | Yours | Distributor’s | | Customer ownership | Yours | Distributor’s | | Inventory risk | Yours | Distributor’s | | Exit liability | Goodwill payment | No statutory payment |

If maintaining brand control and pricing power matters, agency is better. If you want to transfer inventory and credit risk, distribution wins.

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Related contract types: Agency agreement · Distribution agreement

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