Guide · 6 min read
The distributor agreement checklist: six clauses to refuse
I read a first distributor agreement as a loan I am making to the distributor, because his credit period is my money. Six clauses go before I sign: exclusivity over a state, a guaranteed ROI, a credit period with no number on it, returns at any time at invoice value, scheme costs he decides, and a term with no way out. In their place I write one district, fourteen days, one expiry return, one dated scheme and a thirty-day exit.
Read it as a loan
A DB, the distributor who buys your stock with his own money and bills the stores, sends you his standard agreement, and every clause in it prices his risk. I read it the other way round. His credit period is my money sitting in his godown, his scheme line is my margin, and his exclusivity clause is my city.
My rule is to strike six clauses before I discuss anything else. Each one costs a small brand more than the DB's whole cut, which SpireStock puts at 3 to 8 per cent gross on packaged goods, rising to 6 to 12 for a regional brand like yours.
The six clauses I strike
1. Exclusivity over a state
The standard draft grants a state. I would grant one district, or a list of pin codes, with every counter I opened myself named as a direct account in a schedule at the back.
A DB who holds Maharashtra and works Pune has locked you out of every other district in the state for the length of the term. Give him what his van reaches. Add a district only after his secondary sales, what he bills to stores, show the first one reordering.
2. A guaranteed ROI
Some drafts carry a line that the company guarantees the distributor a return, say 15 per cent a year on the capital he parks in your stock. I refuse it outright. A metro DB earns 12 to 16 per cent ROI across his whole bag, and a line that guarantees him more from your one brand means you fund his slow months with credit notes. His ROI is his own arithmetic on your offtake.
3. A credit period with no number
Payment as per mutual understanding is the clause I strike hardest. If you hold Udyam registration as a micro or small enterprise, the MSMED Act already fixes the ceiling: an agreed credit period cannot exceed 45 days from the day he accepts the goods, fifteen days where the two of you agreed nothing, and a buyer who pays late owes compound interest at three times the RBI bank rate. I put fourteen days on the invoice for a first DB, bill-to-bill, meaning each invoice clears before the next lot loads, and I quote the Act only if he argues.
4. Returns at any time, at invoice value
The DB wants to send back whatever does not move, whenever he likes, and have me credit him in full. I take one expiry return per SKU, with near-expiry defined as the last thirty days of shelf life, at the PTD I billed him, the price to distributor, and only against a GST credit note.
Section 34 of the CGST Act is what lets you issue that credit note for returned goods, and it puts a deadline on declaring the note after the financial year ends, so an open returns clause is a tax problem as well as a stock one. On a ₹250 MRP jar the write-off runs about ₹40 a unit. I price one round of it in and refuse the second.
5. Scheme costs decided by the DB
The company shall support market schemes as required is a blank cheque. I give one launch scheme, in writing, with an end date: 10+1, one free on ten, for the first sixty days. After that a scheme is a new one-line letter from me, dated. Without the end date the scheme becomes your price, and four points of margin never come back.
6. A term with no exit
Three-year terms with automatic renewal and no termination clause turn up in first drafts more often than you would expect. I sign twelve months, thirty days' notice from either side, and a line that returns the area to me if he misses the lifting commitment, the monthly cartons he agreed to buy, two months running.
He returns saleable stock at PTD on exit, and I collect it the same month.
What I write in their place
I give one district, fourteen days' credit after two clean invoices, one expiry return, one dated launch scheme, and a lifting commitment set at the cartons moving today. The DB gets a GST bill from day one, a printed price list with PTD, PTR and MRP on it, and my number for the stores that ring him about a late van.
The counters you opened yourself stay in your own hands. Mira writes to those counters for you, and her first real message left on 1 August 2026, approved and sent by hand by the founder it was for.
The checklist, printed
I keep this on one sheet and tick it against his draft before I reply.
The checklist
One page, read against his draftEvery line has a number or a name on it, so the DB argues about a figure. The margin calculator sets the PTD before you print it.
Where this does not work
A super stockist, the state-level buffer who supplies distributors, negotiates on a different sheet, with a C&F agent and a monthly target, and none of this is written for him. A modern trade listing is a listing fee and a category review, argued out in distributor or direct to retail.
Three things founders ask
Should I sign his paper or send mine?
Send yours, two pages, with the checklist above as the first page. His lawyer wrote that draft for a brand with forty SKUs and a sales head.
What if he will not sign without the whole state?
Then he plans to sit on it. I offer the district plus first refusal on the next one once the first reorders, and if that is still a no, I keep walking the beat myself for another quarter.
Do I need a lawyer for a two-page agreement?
I would pay for one read, and I would send the lawyer these six clauses with the question already asked. The CA who files your GST reads the returns clause for free.