An exclusive distribution territory sounds like a guarantee that no one else can sell the same products in your area. In practice, the protection is only as strong as the contract language behind it.
What an exclusive distribution territory is
An exclusive distribution territory is a geographic area, customer segment, or channel in which you are the only authorized distributor for a supplier’s products. The idea is to reward you for investing in the market by keeping competitors from the same supplier out.
Exclusivity can be full or partial. Some suppliers keep the right to sell directly to certain customers, to sell online, or to serve national accounts, even inside your territory.
Questions to ask the supplier
Ask for the details of the exclusive distribution territory in writing and compare them with what was said in conversation.
Write down the answers you receive and ask for any important point to be added to the agreement. A verbal promise from a sales representative is hard to enforce later.
- How is the territory defined, by zip code, county, state, or customer list?
- Can the supplier sell directly to customers inside it?
- Are online sales into your territory allowed?
- Can the territory be reduced, split, or reassigned?
- What happens if you miss a sales target?
Obligations that come with an exclusive distribution territory
In exchange for exclusivity, suppliers commonly require minimum purchases, sales targets, or marketing commitments. Failing to meet them can turn an exclusive territory into a non-exclusive one or end the agreement.
Run the numbers before you accept. If the minimums assume sales you cannot reasonably reach, the exclusivity may cost more than it is worth.
Check whether the territory has real demand
A large territory is not automatically a valuable one. Look at how many potential customers live or operate there, how much they buy, and who already serves them. Talk to a few customers and ask what they would want from a new distributor.
A smaller exclusive distribution territory with strong demand can beat a huge one with little.
Ask the supplier how many customers and how much sales volume in your area it already has. An exclusive distribution territory built on existing demand is easier to grow than one built on hope.
Protect yourself in the contract
Ask an attorney to review the territory clause, the termination clause, and any language about supplier-direct sales. Make sure promises made by the sales representative appear in the written agreement. Our guide to the distributorship agreement explains more of the terms to review.
Decide with open eyes
An exclusive distribution territory can be a real asset when the boundaries are clear, the supplier is reliable, and your costs are realistic. Treat it as one factor among many, not as a reason to skip due diligence.
More about the exclusive distribution territory and related agreements
- Types of Business Opportunities: Franchise, Turnkey, Direct Sales and More
- How to Vet a Business Opportunity: An 8-Step Process
- Business Opportunity Scams: 12 Red Flags to Check
- FTC business guidance
- How to Become a Distributor: A Practical Starting Guide
- What Is a Distributorship? A Plain-English Guide
Helpful outside resources: FDIC.
Keep reading
If this topic is useful to you, these related guides on SmartBizOpps are a good next step.
