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Distribution Agreements: What Are They and Do You Need One?
What is a Distribution Agreement?
As a business owner, there are many different types of contracts you may encounter during the life of your business and, this list increases if your business is in the alcoholic beverage industry. This is because the alcoholic beverage industry is a unique area of business with highly specialized rules and regulations, apart from those governing businesses in general.
For example, a member of this industry may make the decision to enter into a Distribution Agreement. In North Carolina, a Distribution Agreement is synonymous with the term “franchise agreement.” One party has granted the other the right to use its trade name or trademark. In this context, this type of contract is between a brewer (or distiller) and a distributor that allows the distributor to market, sell, and profit from the sale of the brewery’s (or distillery’s) product.
When do you need a Distribution Agreement?
Generally, you must enter into a Distribution Agreement if you wish for your alcoholic product to be sold in retail establishments like restaurants, bars, and liquor stores. North Carolina refers to this situation as its “three-tier system.” This means that if you want to sell your product in North Carolina (first tier), you must do so only to a North Carolina wholesaler (second tier) and, in turn, that wholesalers may then only sell your product to a retailer (third tier) or other wholesalers.
In North Carolina, there is an exception for smaller breweries, defined as selling less than 25,000 barrels per year, who are permitted to self-distribute. At this time, North Carolina does not offer this same exception to distilleries. Businesses who must engage a distributor only once they begin selling more than 25,000 barrels per year. It should be noted, that, to do business in North Carolina, the type of ABC permit that you hold will determine whether or not your Distribution Agreement must be filed according to North Carolina franchise-related laws.
It is true that entering into a Distribution Agreement can significantly affect your margins as a producer. Specifically, this third-party agreement will certainly cause a decrease in your product margins; however, the relationship is likely to result in an increase in product sales. Furthermore, Distribution Agreements can often be extremely difficult to terminate without the right circumstances, so choosing to enter into one is not a decision that should be taken lightly.
Dye Culik PC works with business clients in the area of ABC law and can assist in advising or reviewing distribution agreements. If you operate a business in the alcoholic beverage industry, please contact us and mention this post for a complimentary consultation.