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

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ProblemFree Distribution Agreements Avoiding the Top 10

During many years as a supplier executive, distributor executive, and expert witness, I Mistakes with Distributor
have observed the deterioration of many distribution relationships. Several of those Agreements
relationships concluded in arbitration or a courtroom. Unwinding a distribution
relationship is costly and litigation can be terribly expensive. Such action diverts Balance is Beautiful: A
suppliers and distributors from focusing on their business. Distribution agreements Balanced Distribtution
are sometimes the source of problems between distributors and suppliers. Setting a Agreement Pays Dividends
goal of negotiating a problem-free distribution agreement is certainly worth the eort.
I share some solutions that can reduce the opportunity for needless argument and Balance or Bias - Seeking
litigation among distribution partners. Tips illustrated here apply equally to suppliers Equilibrium in
and distributors. Representaive Agreements

Creating a Sale Presence

Term
in the Global Marketplace
Distribution agreements that include an annual termination clause with
semiautomatic renewal are less likely to face litigation upon termination. Such a Cross-Territory Sales Bring
contract runs until the end of the rst full calendar year. Each party has the Split Commissions:
opportunity to announce that it chooses not to renew at 60 days prior to the end of Splitting Commissions
the agreement. Without notice not to renew, the agreement automatically extends for Across Multiple Territories
another full year. The advantage with annual termination is that both parties have an
opportunity to review the terms of the agreement once each year. This allows both Direct v. Manufacturers
parties to renegotiate unfavorable terms. More importantly, both parties have a Representative: How Best
chance to consider what they might do if their partner chooses not to renew.
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Considering the possibility of termination, however slight the chance, forces suppliers to Organize a Sales Team
and distributors to calculate the value of each of their partners every year. Annual
evaluation is a sound business practice. Annual termination with semiautomatic Distributors Must Manage
renewal provides the distributor and supplier an annual escape clause. Supplier Relationships

Launching a Sales
Cause and Convenience
Presence in a Foreign
Distribution agreements usually contain a clause that allows the parties to terminate Market
their relationship for cause. Less frequently, agreements contain a clause that allows
the parties to terminate for convenience (without cause). Both are important and both Problem-Free Distribution
should be included in contracts linking suppliers and distributors. Few people have a Agreements
problem with inserting a termination for cause clause in a distribution agreement.
Proven Techniques
Gathering agreement from both parties regarding the presence of a problem is easy. Improve Supplier
Gathering agreement regarding the cause of a problem is not easy. Having both
Relationships
parties agree to responsibility for cause is frequently dicult. Parties can eliminate
that diculty with the inclusion of a statement allowing termination for Six Rules for Negotiating a
convenience. With such a clause, either party may choose to notify its partner of its
Better Distribution
plan to terminate the agreement with 60 days notice, without specifying its reason for
Agreement
doing so. The opposing party may not challenge its partner with respect to its
intention to terminate the agreement. A contract with a convenience clause allows
Traits of Successful
both parties, upon notice to terminate, to spend resources on their respective
Representative
businesses, as opposed to investing management time and money in protracted
arguing that often leads to litigation. Avoidance of litigation saves both partners Agreements
resources.
Launching a Sales
A distribution relationship between a manufacturer of medical equipment and its Presence in a Global
distributor serve as an example of the need to include language in the distribution Distribution Channel
agreement regarding termination for cause and convenience. During the rst year of
the relationship, the manufacturer became increasingly concerned that the Tips for Improving
distributor placed very few orders with the manufacturer, although the agreement Supplier Relationships
called for the distributor to place routine stocking orders. Without stock on hand,
thought the manufacturer, winning customer orders would be dicult. Over time,
concern turned into anger and distrust between the parties. When the manufacturer
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decided to terminate the relationship, it found that the distribution agreement was
silent regarding termination for cause or convenience. Upon written notice of
termination, the distributor sued the manufacturer for breach of contract, since the
agreement did not mention termination. The manufacturer ultimately prevailed, but
not until after both parties invested heavily in litigation. The legal proceeding
consumed money, executive time, and overall management focus for the distributor
and manufacturer. Had the agreement addressed termination, the dispute would
probably not have proceeded to court.

Rights upon Termination

When the subject of termination arises, both parties must thoroughly understand
their rights and obligations during two periods. The rst period is the time from the
date when one of the parties sends its partner notice of termination until the eective
date of termination. During this period, may the distributor continue to place orders
with the supplier? Is the supplier obligated to ship products to the distributor against
those new orders? Does the distributor have the right to tell customers that it may sell
the suppliers products? May the distributor return inventory to the supplier for
credit? Is the supplier obligated to issue credit for the inventory returned?

The second period is the time following the eective date of termination. During this
period, may the distributor sell product held in inventory? May the distributor return
product held in inventory? Must the supplier honor a request from the distributor to
return inventory? If the distributor accepted customer orders for product prior to
notice of termination, does the distributor have a right to demand shipment from the
supplier for product on those aged customer orders? If the distributor holds aged
customer orders, is the supplier obligated to continue to ship product to the
distributor after the eective date of termination?

Eliminate arguments by clearly dening the rights and obligations of both the supplier
and distributor during the rst and second periods. Clear denition reduces the
opportunity for argument and diminishes the opportunity that arguments precede to
costly litigation.

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Four Eyes
Most distribution agreements 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 distribution agreements simultaneously.

When a legal professional and not a seasoned sales manager review an 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 reviews 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.

Due Diligence
Lack of due diligence prior to signing a distribution agreement is the greatest cause
leading to the breakdown of a distribution relationship and agreement. Most
terminations occur due to the disappointment of one or both parties. Sometimes
disappointment is unavoidable. However, much disappointment in distribution
relationships stems from inated expectations of the distributors and suppliers
partners while formalizing agreements.

An argument between a distributor and an equipment manufacturer illustrates how

inadequate due diligence can grow into an expensive lesson. The American
manufacturer dispatched a vice president to set up distributors in Asia. Upon arrival
in Hong Kong, the VP was pleasantly surprised to nd a distributor that claimed a
presence all around Asia. The VP was delighted, and signed a distribution agreement
linking the manufacturer and distributor throughout 10 countries. Delight turned to
disbelief within six months, since the distributor placed no orders with the

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manufacturer. Later, the manufacturer stepped up its communications with

customers. To its surprise, the manufacturer discovered that the distributor had
neither presence nor personnel in nine of the countries listed in the agreement. By
the time that the agreement was almost two years old, both parties were in constant
argument. When the manufacturer attempted to terminate the agreement, the
parties could not agree on a reason for termination or its cause. Neither party
accepted responsibility for disappointing sales performance. The manufacturer
ultimately led action against the distributor. The litigation sucked management time,
attention, and resources from both companies. The entire problem could have been
avoided had the manufacturer performed adequate due diligence prior to signing the
distribution agreement. Minimal due diligence could have alerted the manufacturer
that the distributor was little more than one salesman and one oce in Hong Kong.

Conclusion
When negotiating a distribution agreement, compare it to a model agreement
available from a trade association. Ensure that it expires annually and provides for
semiautomatic renewal. Be sure that both parties can terminate the agreement for
cause and convenience. Clearly dene the rights and obligations of both parties
during the termination process and thereafter. Be sure that both a sales professional
and an attorney review the agreement prior to signing. Most importantly, guarantee
that you perform due diligence on your prospective distribution partner.

This article rst appeared in the March/April 2010 issue of Industrial Supply 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 around the world
during the past 30 years. He has integrated divisions of companies upon merger and
acquisition. He advises parties involved with contracts linking suppliers, global customers,
manufacturers representatives and industrial distributors. Contact him at
www.neweraconsulting.com

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