Exports: Should I Use Agents or Distributors?

Which is the Better Choice for Me:  An Agent or a Distributor? 

A local in-country partner is a great way to test or explore a foreign market for your products without investing a lot of capital.  Two of the most common ways to expand your export sales are using agents or distributors. 

But which one should you use?  In general, we recommend using distributors when you can.  But sometimes agents make more sense. 

What’s the Difference Between an Agent and a Distributor? 

First, let’s take a look at the main differences between the two.  The biggest difference is that agents never take title to your product.  They help you make sales to local, in-country customers.  Distributors, on the other hand, purchase your product and re-sell it to their local customers. 

Here’s a quick comparison of agents versus distributors:

When Would an Agent Versus a Distributor Make Sense?

Agents in some ways are simpler because you “own” the customer.  They may be easier to terminate (at least in theory) whenever you have built up a sufficient local customer base so that you want to go direct and have your own local company. 

Agents are often a faster, lower-risk way to test a market.  Agents may try to sell your product locally without investing a lot in creating locally marketing materials, hiring and training local staff, or arranging to transport or store your productss.  Since they make fewer investments in the local business, it can sometimes be easier to pull out of a market that isn’t as attractive as you originally thought.  Beware, though, of local laws giving termination protection to local agents. 

You may need to use agents because of the types of products you sell.  For example, products that are heavy, large, or expensive (helicopters, high-end medical equipment) may be difficult to sell via distributors because they will not have the cash flow to buy the product from you.  Or, the product payment terms acceptable to the distributor may not be acceptable to you. 

These kinds of products also may be difficult for the distributor to collect on from the customer under customary local payment terms.  They often may need to be financed, which creates complexity for the distributor, and lengthens his order-to-cash cycle. 

 Since agents never take title to your products, they also can’t hold local stock of your products.  This may not be a problem if you produce custom products, or ones with an extremely short shelf life (like bakery goods).  Some products that are extremely fragile or very light are probably air-freighted anyway. 

Sometimes you will need to use an agent if there are few distributors in a country.  Perhaps they already carry your competitor’s products.  Sometimes you cannot or do not wish to do business with the available distributors. Perhaps their reputation in the market or their credit history is not acceptable.  Sometimes agents are the only way sales are done in a particular geography.  

Agents Have Disadvantages

If you have a choice, distributors work better for the majority of companies and their products.  Agents have a number of disadvantages:

Agents can trigger tax consequences, unless you monitor and manage their activities carefully.  Activities like allowing them to sign local contracts on your behalf, or giving them freedom to set pricing can result in local taxation.

•  You need to clearly understand the local laws governing agents, both regarding termination rights, as well as employment laws.  Local laws may override whatever you put in your agency agreement.
• Since you sell directly to customers who are based in foreign countries, agents don’t work well if you don’t have sophisticated customs brokers and freight forwarders, because you are responsible for delivery to that customer.
•  Similarly, you must have especially good processes for managing local taxes, handling credit checks, addressing currency risks, and managing local collections. 
• You can’t maintain local stock of products to meet rush orders, changes in demand, or immediate needs for the product.  Some manufacturers incur significant air freight charges to try to ship product quickly.
• Variations in international delivery times can make local customers very unhappy, particularly in the case of government bids or tenders that may require specific delivery dates that are almost impossible to meet without in-country stock for local delivery.
• You are less likely to win local government tenders/bids where local bidders are either required or preferred.  A distributor is often already has a presence in the country, and is treated as a local.   You, on the other hand, may be viewed as a big, bad foreigner.

Another limitation of agents is that their job is really just to help sell your products.  If your product requires significant installation or after-sales support, an agent may not be able to help you.  While some agents may be able to help for a fee, odds are good you will need to provide your own installation and/or after-sales support.  This could be done directly with your people traveling, but make sure you consider some of the issues that can arise in providing services internationally. 

If you choose not to provide these functions yourself, you may be able to find a regional partner to take care of these functions.  Or, you can find local partners in each country — true, your agent may be able to help you find these companies, but it is often complicated to maintain consistency and quality.  In addition, you will have many local partners to manage, and in these situations, many companies simply opt for a local distributor who can handle both sales and after-sales support.  

Conclusion

So, should you use an agent or a distributor?  If you’re thinking about exporting, take the time to investigate and evaluate both models.  If you’ve been exporting using only one model, chances are that at some point, the other model may be a useful alternative to consider.  Before going with either option, be sure you’re familiar with local laws regarding distributors and agents, particularly as to termination, and with agents, with respect to local employment law.  And always do your due diligence on any local partner doing business with them — it will save you a lot of time and trouble later. 

What’s your experience?  What do you think?

Contact us  for a free 60-minute consultation if you’re interested in discussing either or both models.