What to ask a distributor before you sign

A distributor agreement locks you into payment terms, territorial rights and exit conditions that directly affect your cash flow and future growth options. Before you sign, you need clear answers on four deal points: when you get paid, where the distributor can sell, whether they control your entire channel, and how you can end the relationship if it stops working.

Payment terms

Payment terms state when the distributor pays you after they receive your product. Most distributor agreements specify net 30, net 60 or net 90 days. Net 60 means the distributor pays you 60 days after the invoice date or delivery date (the agreement will specify which).

If you sell $10,000 wholesale to a distributor on net 60 terms and they take delivery on March 1, you receive payment around May 1. If your cost of goods is $4,000 and you need to reorder inventory with a 30-day lead time, you must cover that $4,000 from working capital for at least 30 days before the distributor's payment arrives.

Ask these questions:

• Is payment due from invoice date or delivery date?
• What happens if the distributor pays late? (Look for a late fee clause, typically 1.5% per month.)
• Can the distributor take deductions for damaged goods, and what documentation do they need to provide?
• Do you offer early payment discounts? (Some brands offer 2% off for payment within 10 days, written as "2/10 net 60".)

Longer terms help the distributor's cash flow but strain yours. If you cannot cover 60 or 90 days of working capital gap, negotiate shorter terms or ask for a deposit on the first order.

Territory and exclusivity

Territory defines where the distributor can sell your products. Exclusivity states whether that distributor is the only one allowed to sell in that territory, and whether you can sell direct to retailers or consumers there.

A territory clause might read "exclusive distribution rights in California" or "non-exclusive rights in the Pacific Northwest, defined as Washington, Oregon, Idaho and Montana." Exclusive means you cannot appoint another distributor or sell direct in that area. Non-exclusive means you can do both.

If you grant exclusive rights in California and the distributor only actively works Northern California, you lose access to Southern California retailers unless you can prove the distributor failed to meet a performance minimum. That is why exclusivity clauses should include performance requirements.

Ask these questions:

• Is the territory exclusive or non-exclusive?
• What are the geographic boundaries? (Get specific state or county lists, not vague regions.)
• If exclusive, what is the minimum purchase or sales requirement per quarter or year?
• Can you sell direct to consumers (online, farmers markets, your own retail) in the territory?
• Can you sell to national chains that have locations in the territory?

Negotiate a performance threshold tied to exclusivity. For example, "Exclusive rights in Texas contingent on minimum $15,000 wholesale purchases per quarter. If distributor fails to meet minimum for two consecutive quarters, exclusivity converts to non-exclusive with 30 days written notice."

Exclusivity across channels

Some distributor agreements include exclusivity language that extends beyond retail distribution. The contract might state the distributor has "exclusive rights to distribute the products" without specifying retail only. This can block you from selling on Amazon, your own website, at trade shows or through other channels.

Read the exclusivity section for phrases like "exclusive distribution rights," "sole distributor," or "exclusive sales rights." If the contract does not explicitly carve out direct-to-consumer, online, or other channels, you may be locked out of them.

Ask these questions:

• Does exclusivity apply only to retail distribution, or does it include online and direct sales?
• Can you sell on Amazon, your website, or at events in the territory?
• Can you work with other distributor types (food service, salon professional, etc.) in the same territory?

If the distributor wants broad exclusivity, tie it to performance minimums across each channel and make sure the contract defines what counts as retail distribution versus other channels.

Contract length and exit rights

Contract length sets how long the agreement runs. Exit rights define how either party can end it early. Most distributor agreements run one to three years and auto-renew unless one party gives notice.

A typical term clause reads "Initial term of two years beginning on the effective date, renewing automatically for additional one-year periods unless either party provides 90 days written notice of non-renewal."

Without clear exit rights, you can be stuck with a distributor who stops ordering, does not pay on time, or fails to service accounts. The agreement should allow termination for cause (breach of terms, late payment, failure to meet minimums) and include a notice period for termination without cause.

Ask these questions:

• What is the initial term and renewal period?
• How much notice is required to terminate or not renew?
• Can you terminate for cause if the distributor misses payment or fails to meet minimums? How many days notice must you give?
• Can you terminate without cause, and what is the notice period?
• What happens to inventory and outstanding orders when the contract ends?
• Is there a non-compete or non-solicit clause that prevents you from contacting the distributor's retail accounts after the agreement ends?

Negotiate a 30 to 90 day termination right without cause, especially in the first year. This gives you an exit if the relationship does not develop as expected. For termination with cause, specify the conditions (for example, "failure to meet minimum purchase requirement for two consecutive quarters" or "payment more than 15 days late on two invoices") and a cure period (typically 15 to 30 days written notice to fix the problem).

Inventory and returns

Most agreements address what happens to inventory when the contract ends. Some require the distributor to return unsold inventory to you at your cost. Others allow the distributor a sell-off period (30 to 90 days) to clear remaining stock.

The agreement should also state the distributor's right to return unsold or damaged products during the contract term. Accepting returns hurts your cash flow and inventory planning. If you must allow returns, limit them to damaged goods with photographic proof or require restocking fees (typically 15% to 25%).

Ask:

• Can the distributor return unsold products during the contract term, and under what conditions?
• What happens to the distributor's inventory when the agreement ends?
• Who pays shipping for returns or end-of-term inventory?

How to compare offers from multiple distributors

If you have offers from two or more distributors, compare them on these four factors:

1. Cash flow impact: Calculate how long your working capital must cover the gap. A distributor offering net 30 with a smaller territory may be better than net 90 with a larger territory if cash flow is tight.
2. Territory value: Estimate retail potential in each territory. Exclusive rights in a small territory may generate less revenue than non-exclusive rights in a large one.
3. Performance requirements: The distributor with the lowest minimum purchase requirement is not always the best choice if they are not confident enough to commit to meaningful volume.
4. Exit flexibility: Shorter initial terms and easier termination rights reduce risk when you are testing a new distributor relationship.

Make a table with payment terms, territory, exclusivity, minimums and exit notice period for each offer. Weight the factors by what matters most to your current business stage. If you need cash flow, prioritize payment terms. If you need market coverage, prioritize territory and non-exclusive rights.

What to do this week

• Pull the distributor agreement template or offer you received and highlight the sections covering payment terms, territory, exclusivity and termination. If any of these sections are missing, add them to your negotiation list.
• Calculate your working capital gap for the proposed payment terms. Take your wholesale price per unit, multiply by a realistic first order quantity, subtract your cost of goods, and determine how many days you must cover that amount before payment arrives.
• Write out your minimum acceptable terms for territory (specific states or regions), exclusivity (retail only, with performance minimums), and exit rights (30 to 90 day termination without cause in year one). Use these as your negotiation starting point.
• If you are comparing multiple distributor offers, build a comparison table with payment terms, territory scope, exclusivity type, minimum purchase requirements and exit notice period for each. Identify which offer best matches your cash flow and growth priorities.

SellToStores helps health, beauty and FMCG brands get placed with distributors and independent retailers. It starts with a free retail distribution audit.