Guest Post: What to Know About Distribution Agreements

May 5, 2025

If you are ready to expand your hemp product business, chances are you are considering working with a distributor. Distributors serve as intermediaries, connecting your products to a broader network of retailers and extending the geographic reach of your brand. The agreement that you sign with a distributor, however, is more important than you may realize. This contract covers everything from the distributor’s territorial rights to order and payment procedures, and even the handling of product recalls.

Before entering conversations with a potential distributor, it’s crucial to understand the key components of a distribution agreement, important provisions to watch for, and the terms you may want to negotiate. Here’s what you need to know:

Key Provisions in a Distribution Agreement

1. Products and Product Lines The agreement should clearly define which products and product lines the distributor is authorized to sell. Will it cover only hemp products or will it cover all non-alcoholic beverages if you decide to start offering non-hemp and non-alcoholic products? Additionally, consider whether the distributor will have rights to distribute future product extensions or entirely new products as they are developed.
   

2. Territory and Exclusivity

   Most distribution agreements define an exclusive territory for the distributor. You may, however, want to consider carveouts if you have already established relationships with retail accounts in the otherwise exclusive territory. Additionally, some producers sell their hemp beverages online directly to consumers – you should make sure you reserve this right in the distribution agreement.
   

3. Ordering and Payment Procedures

   It’s essential to set clear processes for how orders are placed and payments are made. How much time do you need to fulfill an order after the order has been placed? And how much time after receipt of the products does the distributor have to pay off its balance? While you may not think these issues are likely to come up, cash flow in supplier–distributor–retailer relationships can be difficult and you want to be protected from late payment or non-payment scenarios.
   

4. Beware the Accidental Franchise. 

   Be cautious with minimum purchase requirements. In some cases, imposing them can legally transform your distribution relationship into a franchise, creating additional regulatory burdens and potential liabilities. Consult with an attorney before setting any minimums.
   

5. Product Recalls and Quality Issues

   Problems with product quality are inevitable in any distribution relationship. Your agreement should outline procedures for managing defective products, responsibility for the costs associated with product recalls, and methods for determining fault if quality issues arise.
   

6. Distributor Obligations

   Often, distribution agreements are vague regarding distributor responsibilities, making it very difficult for suppliers to put pressure on distributors to perform. To protect your interests, you should negotiate clear, tangible requirements such as reporting obligations, marketing activities, and product storage and handling standards. This is important because if the distributor’s obligations are vague or minimal, you may not be able to terminate the agreement without paying a sizeable fee to the distributor.
   

7. Trademark License

   Distributors will need to use your trademarks to market your products. Include a trademark license provision to control how your brand is used and to protect your brand’s reputation and value.
   

8. Termination

   Termination provisions are essential – they may be your only way out of an otherwise sour relationship with a distributor. Many distributors, however, require the payment of a termination fee when the supplier terminates without cause, which fee can be sizeable and cost-prohibitive. This is why it’s important to have obligations on the distributor – you may be able to negotiate the right to terminate for cause if the distributor breaches the agreement. If the agreement imposes no meaningful obligations on the distributor, there may not be anything for them to breach.

Final Thoughts

When selecting a distributor and negotiating a distribution agreement, it’s vital to keep these issues in mind. Distribution relationships are often long-term commitments that can become expensive and difficult and/or costly to exit if problems arise. Consulting an experienced attorney before signing any agreement is a wise investment to ensure your interests are protected and to avoid unexpected pitfalls.

Elliot Ginsburg and his colleagues at Garner Ginsburg & Johnsen, P.A. represent businesses in a variety of areas. They advise cannabis and hemp companies in matters ranging from business formation and financing arrangements to compliance and contract negotiation. Based in Minneapolis, Elliot has been a key legal partner for Minnesota’s hemp-derived edibles businesses since the state’s hemp-derived THC laws took effect, helping clients navigate evolving regulations with clarity and precision.

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