9/20/2016 SixRulesforNegotiatingaBetterDistributionAgreement|GlenBalzer

Glen Balzer
Management & Forensic Marketing Consulting on Sales Channel Relationships&Contracts

Six Rules for Negotiating a Better Distribution Avoiding the Top 10

Agreement Mistakes with Distributor
Agreements
When distributors and suppliers are courting one another, several priorities emerge:
greater sales, better prot margins, enhanced market share, expanded geographic Balance is Beautiful: A
coverage, and more. The often tedious and boring details of a distribution agreement Balanced Distribtution
capture the attention of neither distributor nor supplier. So long as the relationship Agreement Pays Dividends
ourishes, most parties spend little time reading or reviewing words in the
distribution agreement, usually stued into a dark ling cabinet. If the glamour of the Balance or Bias - Seeking
relationship begins to fade, one or both parties likely hunts for the agreement and Equilibrium in
begins to review the document more closely.
Representaive Agreements
Once the distributor or manufacturer examines the distribution agreement for
options, aws previously overlooked become obvious. Minor problems with the Creating a Sale Presence
document emerge as major issues. Without quick management attention, the in the Global Marketplace
distribution relationship easily fades. Once that happens, more people begin to study
the agreement. Minor blemishes in the relationship grow in scope and importance. Cross-Territory Sales Bring
The relationship begins to unravel. Split Commissions:
Splitting Commissions
Don't let details set forth in a distribution agreement become a distraction, or worse, Across Multiple Territories
a source of growing frustration. Spend incremental management time on growing the
distribution relationship, sales and prots. Eliminate common problems while Direct v. Manufacturers
negotiating the agreement. By not inserting problems into the agreement, Representative: How Best

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management can spend its time on the most important issues: developing and to Organize a Sales Team
expanding the relationship between the supplier and distributor. Here are six rules to
follow when negotiating that next distribution agreement. Distributors Must Manage
Supplier Relationships
1. Balance Launching a Sales
Balance in a distribution agreement ensures that neither party holds unfair power Presence in a Foreign
over the other. Both parties should have the opportunity to terminate the agreement Market
under similar conditions. If one party may terminate the agreement on 60 days notice
without penalty, the other party should have the same opportunity. Problem-Free Distribution
Agreements
An experienced party rarely inserts imbalance into a distribution agreement. Parties
are sometimes not aware of bias while negotiating the contract. When problems arise Proven Techniques
in the relationship between the distributor and the manufacturer, both parties are Improve Supplier
likely to study the agreement in detail. Once either party detects bias in the
Relationships
agreement, it serves to increase friction in the relationship. That unnecessary friction
works against sales and sales growth. One-sided agreements are a ticking time bomb. Six Rules for Negotiating a
Avoid explosions easily by ensuring that the agreement contains no clause that favors
Better Distribution
one party over the other.
Agreement

2. Due Diligence Traits of Successful

Representative
During several years of managing relationships and contracts between distributors
Agreements
and suppliers, both as a distributor and supplier, I have concluded that lack of due
diligence is the leading cause of failure in those relationships. The courtship between
Launching a Sales
distributors and suppliers is very much akin to the courtship between brides and
grooms. During courtship, bothHomepartiesArticles Speaking
observe the Topics and
best attributes Glenoften
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ignore ContactPresence in a Global
the worst attributes of their prospective mates. Distribution Channel

After a distributor and supplier sign a distribution agreement and begin building a Tips for Improving
relationship, both parties must learn and truly understand the strengths and Supplier Relationships
weaknesses of their partners. If inadequate due diligence was performed, parties will
discover new problems with their partners. Too often, those problems come as an

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unpleasant surprise. Avoid those unpleasant surprises by performing sincere due

diligence.

What is sincere due diligence? Don't just listen to a prospective distributor or supplier
and watch its polished presentations. Interview customers. Interview current and
prior employees. Investigate how people in purchasing rate the prospective partner in
terms of service, quality and integrity. Interview customers' personnel in engineering,
quality, manufacturing and procurement. It is dicult for a prospective distributor or
supplier to hide poor past performance. However, if parties do not question
customers and sta, it is impossible to detect poor practices, service and quality until
after the agreement is in full eect. Negative inputs gathered while conducting due
diligence can be disappointing. However, those same revelations gathered once the
contract governs the relationship can be shocking and costly.

3. Annual Termination and Semiautomatic Renewal

Calling for annual termination and semiautomatic renewal is a routine procedure
among experienced players. In these cases, there is a provision in the agreement
calling for termination of the agreement at the end of the rst full calendar year of
service and each year thereafter. Terms and conditions allow either party to submit a
Notice of Intention to Not Renew 30 days prior to the end of the calendar year.

When a distributor agreement calls for annual termination with semiautomatic

renewal, both parties have the opportunity to withdraw from the agreement without
proving cause. Using this methodology, performance not a collection of words in the
agreement holds the partnership together. Seasoned partners always prefer to have
performance as the binding force in the partnership.
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4. Comparison with Proven Industry Agreements

Parties make most mistakes with distribution agreements based upon lack of
experience negotiating agreements. Most large companies with years of experience
with agreements rarely sign contracts with errors. Many mistakes are the result of

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one partner attempting to gain advantage over the other partner by inserting a bias
into the agreement favoring the party with greater experience.

There are several methods by which to level the playing eld during negotiation. First,
solicit a model agreement from your industry's distributor association. Many
distribution associations provide a model agreement free of charge or at modest cost
to their members (National Electronic Distributors Association, Material Handling
Equipment Distributors Association, etc.). The model is a good baseline from which to
compare the agreement under negotiation.

Second, alert your network of friends in the industry. Although it is unlikely that a
direct competitor would lend a copy of its distributor agreement, friends at indirect
competitors usually have no fear of sharing an agreement that has proven to be
problem free.

5. Four Eyes versus Two Eyes

A root cause that leads suppliers and distributors into litigation upon termination is
often a poorly worded distribution agreement. Most of the time, litigation could be
avoided with better construction of the contract. Most distribution contracts benet
from review by people experienced with creating and negotiating contracts.
Sometimes attorneys review the contracts. Sometimes sales managers with
distribution agreement experience review the contracts. The best results come when
both a legal professional and a seasoned sales manager review the distribution
agreement.

When a legal professional and not a seasoned sales manager review a distribution
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agreement, the resulting document can be legally acceptable, but commercially
ineective. When a seasoned sales manager and not an attorney review a contract,
the resulting agreement can be commercially eective, but legally unacceptable.
Hence, when only two eyes review a distribution agreement, problems can arise.
When, however, four eyes review an agreement, two from an attorney and two from a
seasoned sales manager, the probability of a legal skirmish upon termination
diminishes greatly. Four eyes are better than two.
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6. Cause and Convenience

Any distributor or supplier that has been involved in a legal dispute at the end of a
distribution relationship often regrets the absence of at least one clause in the
agreement.
Termination for convenience is often one of those missing clauses. Parties may
terminate an agreement for cause or for no cause at all. An agreement should spell
out termination under both conditions. Both the supplier and the distributor must
have the opportunity to terminate for cause and convenience: 1) the distributor may
terminate the agreement for cause; 2) the distributor may terminate the agreement
for convenience; 3) the supplier may terminate the agreement for cause; and 4) the
supplier may terminate the agreement for convenience.

Termination for cause proceeds smoothly so long as both parties agree to the source
and responsibility of the cause, and agree to dissolve the agreement and relationship.
Unfortunately, it's often dicult to agree to cause in the real world without protracted
discussion, sometimes involving attorneys. Extended discussion consumes
management time. Involvement of attorneys consumes both management time and
money. Save time and money, while minimizing frustration by including a termination
for convenience clause.

Conclusion
Write the distribution agreement in a balanced fashion. Be sure to perform adequate
due diligence. Allow for annual termination with semiautomatic renewal. Compare the
next distribution agreement with other proven contracts. Have the contract reviewed
by both a seasoned sales manager
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an attorney. Include
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parties to terminate for convenience.

This article rst appeared in the November 2009 issue of Industrial Distribution magazine.
Glen Balzer is president of New Era Consulting, a marketing and sales consulting rm. He
has created, upgraded, and managed marketing and sales organizations for distributors
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and suppliers around the world during the past 30 years. He has integrated divisions of
companies upon merger and acquisition. Contact him at www.neweraconsulting.com

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