A distribution agreement is one made between a manufacturer and a supplier to distribute and/or sell items manufactured. The supplier may make a distribution agreement with separate stores selling the product that involves how goods will be merchandised or how much supplies will available to the store. A distribution agreement may also include terms regarding advertising of a product.

Generally the manufacturer pays a fee to enter into a distribution agreement with a supplier. However, a balanced distribution agreement will provide opportunities to make money for both the manufacturer and supplier. Often the manufacturer makes the least money.

For example, a farmer may enter into a distribution agreement with a produce supplier. The farmer will get a price for his wares, the supplier will then sell the wares for a larger price, and the supermarket will charge still more to consumers who wish to buy the farmer’s products. Ultimately the three-tiered approach means everyone makes money, but the farmer makes the least.

In other situations profits may be more equally shared. Perhaps a director has made a film, and signs a distribution agreement with a studio to market and sell the film to theaters. Additionally the distribution agreement might include marketing and selling the film to video stores at a later point. Both the filmmakers and the distributors will make money from such a distribution agreement.

Often studios make films, so distribution is already a responsibility of the studio. If the film is marketed in other countries, it may need to be distributed through a separate distributor and require an additional distribution agreement.

A distribution agreement may include the specifics of how long the distributor will work for a set price, and the specific way in which the goods will be distributed. Usually a distribution agreement is fairly long so that the manufacturer knows his goods have the best chance of reaching the largest possible market.

Some manufacturers choose not to use a distributor to disperse their goods. This may be the case when the inventory of goods is relatively small. For example, the farmer may have only a small farm, and may choose to sell his produce at local farmers’ markets instead of selling produce to distributors. He may pay a small fee for distributing his goods at local farmers’ markets, which is an informal distribution agreement.

However, the farmer who cuts out the distributor tends to make a little more on his produce because he can charge supermarket prices instead of the low prices expected by a distributor. In some cases, small businesses actually make more by “cutting out the middleman” and distributing goods on their own.