More articles by Glen Balzer
|
Get notified about new articles - join the ExpertPages Mailing List now
|
Far too frequently,
the shortcomings of a distributor agreement are not apparent until a distributor
relationship deteriorates. If the unwinding of a relationship leads to court,
the costs to both the manufacturer and distributor quickly escalate, reversing
years of accumulated profit. Care must be exercised when drafting and approving
the agreement to ensure the presence of a minimum of two features: First, the
agreement must be written in a balanced style, providing unfair advantage to
neither party. Second, the agreement must be compared to several other agreements
used within the same industry in order to make certain that no standard features
are omitted. An attorney can review an agreement and evaluate whether the agreement
is balanced. However, only by comparing the agreement with others in the same
industry can a party signing the agreement be assured that important elements
are not deleted.
Distributor agreements
must promote balance between the power of a distributor and manufacturer. Clever
wording in an agreement that stacks more power toward one partner relative to
the other ultimately erodes trust. Performance excels where trust is nourished
and allowed to thrive. Where trust is questioned, neither party applies optimum
levels of energy toward achieving the goals of the partnership. An unbalanced
agreement draws energy away from sales and growth performance, and toward issues
of compliance with the terms and conditions of the agreement. The best distributor
agreements are written with attention paid to a balance in the relative power
between the distributor and manufacturer.
An objective
in common for both the distributor and the supplier is leverage. The distributor,
with the addition of a new supplier, has a greater product line to sell to its
customers. That expanded product line affords the distributor to become increasingly
important to its customers. The distributor benefits from the advantage of selling
more products to its existing customers with the same sales team. The supplier,
with the addition of a new distributor, enjoys more people selling its products.
The supplier benefits from the advantage of an expanded sales force selling
the same product line. Both the distributor and the supplier exploit the power
of greater sales without greater cost.
Relationships
are Organic
Relationships between distributors and manufacturers
are organic. Those relationships are born, often of highly enthusiastic parents
with immense expectations. The relationships grow and develop during at a time
when they are in a period of great change. The relationships later mature as
growth slows down. Once growth ceases and sales begin to slow, relationships
begin to decay. After a long period of decay, relationships ultimately die or
must be put to sleep. People involved with managing relationships between suppliers
and distributors recognize this organic analogy. Sales executives and managers
who are new to relationships involving distributors and manufacturers need to
understand the life cycle of relationships. Knowing where a manufacturer and
a distributor are in their life cycle is very helpful in understanding the relationships
being formed when the distributor agreement is signed.
Performance,
not Words, Supports Sales Growth
Words in a distributor
agreement rarely extend the life of a relationship between a distributor and
a manufacturer. However, properly constructed words and clauses in an agreement
can make life easier for all involved during the lifetime of a distribution
agreement. Equally important, skillfully constructed words and clauses can avoid
agonizing battles when it is time to recognize that the relationship either
is dead or must be put to sleep. When the time comes to terminate the relationship
for any of dozens of reasons, parting company without a legal skirmish allows
both the distributor and the supplier to continue to focus time and energy on
customers and not in courtroom or arbitration battles.
What Does
Balance Accomplish?
The best agreements
integrate recognition of balance into the agreement. Why balance? When a distributor
feels neither subservient nor superior to the manufacturer, both parties apply
energy to mutual objectives: expanding sales, improving market share, driving
manufacturing margin for the manufacturer, pushing gross margins for the distributor,
and growing the number customers. When a distributor believes that the relationship
and agreement with a suppler is well balanced, the mutual objectives shared
at the creation of the distributor agreement have a chance of success. Balance
does not guarantee success, but lack of balance almost certainly guarantees
failure of the relationship.
Examples of Balance
In
order to ensure that balance is understood, perhaps some examples are in order.
Here are three: First, if a distributor can terminate the agreement for convenience,
the manufacturer must be able to terminate the agreement for convenience, also.
Second, if the supplier indemnifies and holds harmless the distributor if the
supplier becomes embroiled in litigation, the distributor should likewise indemnify
the supplier when the distributor becomes a defendant in a legal proceeding.
Third, if the supplier can terminate the agreement for a number of specific
causes, the distributor should also have a list of reasons that might be used
to terminate the agreement.
Industry-wide Comparison
Relationships
between manufacturers and distributors are generally born during a period of
excitement. The distributor's sales team represents a dramatic increase in the
number of people promoting the manufacturer's brand and product line. The product
offered by the manufacturer nicely expand the distributor's product line and
hence its importance to customers. Unfortunately, when a relationship unwinds
and the distributor agreement must be terminated, problems that were hidden
or merely unobserved began to erupt like volcanoes. During the operating life
of a distributor agreement, omissions in the agreement might be conveniently
ignored. Why? Sales are growing. Profits are growing even faster. Not until
termination of the agreement do some omissions become obvious.
An easy way to ensure that
routine agreement clauses are not omitted is to perform a comparison between
today's proposed agreement with several live agreements found within the same
industry. Be sure to take time to gather a representative sample of agreements
before approving and signing that next distribution agreement.
Conclusion
Evenhanded wording in
a distributor agreement will probably not extend the life of a relationship
between a distributor and supplier. However, one-sided language often hastens
the end of a relationship. More important is that a balanced distributor agreement
creates an environment whereby an expiring relationship allows both parties
to withdraw from that relationship without becoming snarled in a legal proceeding.
Before approving and signing that next distributor agreement, be sure to compare
it to the agreements of competing distributors and manufacturers within your
own industry. Check it for balance now and know that problems will be avoided
when the relationship ultimately expires.
