Expert Article Library
Adding Value to Distributor Agreements
by Glen Balzer
Glen Balzer Email: GlenBalzer@msn.com Glen Balzer is a management and forensic consultant involved with domestic and international sales and marketing. He advises parties involved with contracts between suppliers, manufacturers' representatives, global customers and industrial distributors. He promotes conflict resolution between parties involved in distribution and representative agreements, serving as an expert witness. He has significant experience with integration and rationalization of merged and acquired companies. For 30 years, he has been involved in all aspects of establishing and managing marketing and sales organizations throughout America, Europe and Asia. © 2004 Glen Balzer. Reprinted with permission.
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.
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.
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.