A Guide To MOUs For Distribution Agreements  

When manufacturers want to expand their market reach through third-party distributors, identifying the right partner is one of the biggest challenges. 

This is where a Memorandum of Understanding (MOU) is a useful tool to filter potential distributors before committing to a full-fledged Distribution Agreement. 

If you’re a manufacturer based in Malaysia, keep reading as we explain why.

Why an MOU before a Distribution Agreement? 

Lying in between equally risky verbal promises and full-fledged contracts, MOUs are a practical middle ground as a generally non-binding way to initiate early-stage engagement that still carries legal weight.  

With an MOU, manufacturers can: 

• gauge sincerity and capability 
• test alignment with your broader distribution strategy and regional goals 
• set soft performance indicators like trial KPIs, and
• evaluate commitment 

Think of it as a “trial phase” to evaluate a distributor.  

Only if they demonstrate continued interest and alignment throughout this trial should the parties proceed to a formal, long-term agreement. 

Key MOU clauses  

To maximise the effectiveness of an MOU to screen distributors, the document should contain provisions that guide performance and safeguard your interests, which include the following: 

Clause	Description
Territory and Scope	Clearly define the geographical area, product categories, and customer segments the distributor is permitted to explore.
Trial Period and Performance Indicators	Set a defined evaluation window (e.g., 3–6 months) and outline soft KPIs, such as minimum sales volume.
Non-Exclusivity	Make it clear the MOU does not grant exclusivity, allowing you to engage other potential distributors during the same period.
Confidentiality	Protect sensitive business information (e.g., product pricing, supply terms).
Termination Clause	Preserve the right to exit without obligation at the end of the MOU term.
Good Faith Obligation	Requires both parties to act professionally and communicate respectfully throughout the MOU period.
IP Use Limitation	Define the scope, duration, and approval process for any use of your brand name, logo, product images, or marketing materials.
Reporting Requirements	Mandate regular updates or basic reports during the MOU period.
Non-Circumvention Clause	Prevents the distributor from bypassing you to contact shared leads, suppliers, or customers directly.

Hypothetical example 

Let’s pretend a local food manufacturer had a rapidly growing snack brand (the secret is three times as much sugar as other competitors).

As regional interest increased, several overseas distributors approached with proposals, promising to handle marketing and distribution across Southeast Asia. 

Eager to expand, the manufacturer verbally agreed with one distributor who appeared enthusiastic and well-connected. Due to a desire to “move quickly,” both parties postponed signing a formal Distribution Agreement, opting instead to proceed based on trust. 

Unfortunately, the distributor underperformed, and: 

• products were ordered in bulk then left idle in storage, never reaching retail shelves 
• credit terms were extended beyond 90 days and the distributor eventually defaulted 

With no formal legal documents to enforce responsibilities, the manufacturer was left high and dry with no remedy and recourse. 

How an MOU could have helped 

An MOU, even if largely non-binding,  would have provided soft enforcement mechanisms to reduce uncertainty during their early-stage relationship such as:

• a trial period clause to limit the duration of the engagement
• performance benchmarks to gauge sales and outreach effort
• a non-exclusivity term to preserve flexibility. and
• a termination clause allowing the manufacturer to walk away if expectations were not met

Had the parties included a non-performance termination clause which clearly stated failure to meet performance targets would justify ending the engagement, the manufacturer would be able to refocus to alternative distribution channels the moment the distributor failed.

Takeaways for manufacturers 

Too often, early-stage distribution discussions happen over calls, meetings, or casual “understandings”, only for them to later fall apart over misunderstandings. 

For manufacturers, especially those with multiple brands or growing product lines, let the MOU serve as your vetting ground, ensuring only the most capable distributors become long-term partners.