Exclusive distribution agreements: how to decide

An exclusive distribution agreement appoints one distributor as the only party permitted to sell your product within a defined scope — normally a country or region, sometimes a channel (pharmacy, salon, grocery) or a customer type. For the term of the contract you give up three things at once: the right to appoint anyone else there, in most drafts the right to sell directly yourself, and your negotiating leverage, because the distributor now knows you have no alternative route to that market.

In exchange you should be buying something concrete: committed purchase volumes, a funded launch, registration and compliance work, shelf space you could not win alone. If the draft in front of you grants exclusivity without naming what you get back, it is not a deal yet — it is an option the distributor is taking for free.

Exclusivity tends to pay when most of these are true:

• The market needs real upfront investment — product registration, local certification, translation, clinical or safety files, a warehouse, a field sales team.
• The distributor must build the category, not just fill orders into demand you already created.
• You cannot service the territory yourself in the next 24 months without distracting your core market.
• The distributor has verifiable existing distribution into the exact channel you want.
• You can measure performance monthly, so failure surfaces in quarter two rather than year two.

It tends to fail when the distributor's real motive is to block a competitor's supply, when the territory is already buying from you through other routes, or when your product is one of two hundred lines in their catalogue and nobody there owns its number.

1. Scope. Name the territory, the channels and the product lines precisely. Exclusivity over "the Middle East" is a different company from exclusivity over "retail pharmacy in the UAE for the three SKUs listed in Schedule 1".
2. Minimum purchase targets. Volume or value, per quarter, in writing, escalating year on year. Without them exclusivity has no price.
3. The consequence of a miss. The target is worthless unless missing it does something: exclusivity converts to non-exclusive automatically, or you may terminate on 30 days' notice. Make it automatic, not a right you must negotiate again while they hold your market.
4. Term and renewal. A short initial term (commonly 12 to 24 months) that renews only on performance beats a three-year term with a break clause you will hesitate to use.
5. Pricing and payment. Your wholesale price, the currency, who carries currency movement, payment terms, and what happens to shipments when they are overdue. Do not set their resale price — see the competition-law section.
6. Brand control. Approval rights over marketing, packaging, claims, pricing positioning and which retailers carry you. Register your trade marks in the territory in your own name before signing, not theirs.
7. Exit. Termination rights, notice, what happens to remaining stock, customer and registration transfer, post-term non-compete, and governing law. In several markets local agency and distribution statutes give the distributor compensation or registration rights on termination that override your contract; check before you choose the territory, not after.

Supplier-to-distributor contracts are "vertical agreements". Under the UK's Vertical Agreements Block Exemption Order and the EU's Vertical Block Exemption Regulation, they are broadly permitted where both the supplier's and the buyer's share of their relevant markets is under 30% and the contract avoids hardcore restrictions. The two that catch suppliers most often:

• Resale price maintenance. You may set a maximum or a recommended resale price. You may not fix a minimum, and you may not enforce a "recommendation" through pressure or penalties.
• Blocking passive sales. You can stop a distributor actively marketing into another distributor's exclusive territory. You generally cannot stop them fulfilling unsolicited orders from customers there, and blanket bans on selling online fall foul of the same rules.

Non-compete obligations on the distributor are usually limited to five years, and post-term restrictions are narrow. This is a summary of the general position, not legal advice on your contract — have a competition lawyer review the draft if you are anywhere near the 30% threshold or the clauses above.

• Exclusivity granted before performance is proven. Run six to twelve months non-exclusive first and let them earn it.
• Targets measured on orders placed, not stock sold through. A distributor can hit year-one targets by filling their own warehouse and then buy nothing in year two. Require sell-through and inventory reporting.
• Registrations and trade marks held in the distributor's name. You then cannot leave the market without their consent, at whatever price they name.
• No named owner. Get the individual account manager, their targets and a monthly review in the contract.
• Direct and e-commerce sales not carved out. If you sell from your own site into that territory, say so explicitly, or you will be in breach of your own agreement.

• Which of their existing brands competes with mine, and what happened to the last one they dropped?
• Which specific retailers or accounts will carry this, and by what date?
• What are they investing — cash, headcount, registration cost — and is it in the contract?
• What volume are they committing to in each of the next eight quarters?
• If they miss by 30%, what happens automatically, with no further negotiation?
• Who owns the product registrations and trade marks in the territory on day one and on exit day?
• What is my route back into this market if this ends badly in 18 months?