A distributor of products operates for many years and gains a long list of clients. Does the distributor has its own independent reputation or does all reputation belong to the manufacturer?
Reputation is the gained benefits of the business due to its unique properties. It is important to determine whether the reputation belongs to the distributor or the manufacturer for various reasons. The primary one is the question of who owns the reputation - the manufacturer or the distributor - and accordingly, whether the manufacturer will be required to compensate the distributor in the event of termination of the distribution agreement. Another issue is upon sale of the distributorship – is such sale is also to be deemed a sale of reputation? This question has a large impact on the taxation of such transaction.
In the Barak Gas Agencies Ltd. case of January 2015, the Israeli Supreme Court held that if as part of the sale customer lists were transferred and the seller fully withdrew from its business and given up any future connection with the customers and even signed a non-compete clause the Court will be willing to consider the sale also as sale of reputation. In order to prove an independent reputation of the distributor, the distributor will have to prove not only that the market is a direct result of its marketing efforts but also that by such efforts the product is recognized with the distributor more than with the manufacturer. There might be also a situation where the distributor has its own reputation even though the product may be more recognized with the manufacturer (and in that case the reputation belongs to the manufacturer).
The recognition of an independent reputation of the distributor will have, as mentioned, a large tax impact and may also have consequences as between the distributor and the manufacturer upon termination of the distribution agreement. If the distributor has its own reputation in the product the manufacturer might be required to compensate the distributor for termination of the distribution agreement.
Because the recognition of the reputation upon sale of a business may have consequences it is recommended that the agreements between the parties to a sale of distributorship be clearly drafted leaving no doubt as to the rights sold and it is certainly recommended that an attorney and an accountant specializing in the field of distribution agreements will be involved.
Moreover, it is important that when a manufacturer and distributor are negotiating distribution agreement the negotiation will be made by a lawyer who specializes in the distribution agreements who will also draft the documents to ensure that the agreement between the parties, including as to the right to the reputation will be properly set in the agreement.