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Value-Added Reseller Agreements: Improving Results

by Glen Balzer

Value-Added Reseller Agreements: Improving Results

Value-added reseller agreements founded on the principle of equality between value-added reseller and supplier survive longer than those do where one partner is favored over another due to clever clauses, terms, and conditions. Long-living agreements are relatively simple and balanced, while short-living agreements are comparatively more clever and imbalanced. A sound agreement need not be clever, but must demonstrate a fairness that comes only from a balance of power between the supplier and reseller.

Creating Imbalance

All relationships and agreements between value-added resellers and manufacturers ultimately expire. Expiration is sometimes amicable, as when both parties move ahead in different directions. Upon disengagement, the value-added reseller creates a new partnership with an established and enthusiastic supplier while the manufacturer creates a relationship with a new promising reseller. However, parting company with a former partner in a value-added reseller agreement sometimes becomes acrimonious and demands help from legal professionals. Too frequently, where a partnership between manufacturer and reseller ends in a legal dispute, the agreement did not treat both parties equally. How does imbalance enter an agreement? The partner that is relatively inexperienced with drafting value-added reseller agreements creates most imbalances. A partner sometimes attempts to stack advantages toward one side of the partnership in an attempt to make a better deal for itself than for its partner. One partner becomes too shrewd while attempting to make its life better by exploiting the inexperience of the other partner when drafting and negotiating the agreement.

Parties seasoned in value-added reseller agreements understand that imbalance in the wording of an agreement does not promote long-lasting partnerships. The objective of drafting imbalance into an agreement is generally to increase the advantages of one partner over the other. Unfortunately, imbalance leads to legal skirmishes and not to an improved or lasting relationship. Both partners must remember that the primary objective of a partnership between a reseller and a supplier is greater sales, improved market share, better profit margins, or a combination of these goals. The objective of a reseller or manufacturer should never be a list of advantages in an agreement of one partner over another. Resolution of biased agreements regrettably often involves attorneys and courts, costly to both parties.

Value v. Verse

Words and phrases cleverly crafted in a value-added reseller agreement rarely extend the life of a partnership between a reseller and a supplier. A partnership survives only so long as both partners believe that there is a benefit to a continuing relationship. Once perceived value erodes, the partnership is finished, followed closely by expiration of the agreement.

Original signatories to a value-added reseller agreement are generally optimistic about launching the new partnership. No one involved with the creation of an agreement looks forward to its demise. Although premature expiration of a relationship between a reseller and a supplier might be disappointing, partners must avoid a legal dispute arising from disengagement.

The breakup of a partnership is not necessarily an improper course of action. When a value-added reseller partnership unwinds, both parties have a choice of focusing on their own respective businesses and attendant customers, or spending management time and company resources on a legal dispute that will still result in the dissolution of the partnership. Executive time, management attention, and financial resources allocated to a legal dispute represent a shift of focus away from the business and away from customers. Since inequitable agreements more frequently result in legal conflict, striving to create a well-balanced agreement is worth the incremental effort. An ounce of preventive energy striving to draft a balanced agreement is worth a pound of legal energy struggling to avoid a costly award of damages in court.

Examples of Balance and Imbalance

Value-added reseller agreements containing slick phrases and clauses that afford greater power to one partner over another are asymmetric. When partners create an agreement without symmetry, the agreement suffers a higher probability of an early expiration. Partners in an agreement that is uneven might be satisfied during periods when the metrics are favorable: rising sales, increasing market share and climbing profit margins. However, all metrics rise and fall over time. A time-tested partnership must weather declining metrics. If metrics are poor for an extended period, one or both parties may seek an exit from the agreement. Problems with an imbalanced agreement usually surface only when the parties wish to terminate the agreement.

As an example, an agreement that allows the supplier to adjust prices only once a year is unfair. A manufacturer must confront changing costs throughout the year. To expect the manufacturer to endure rising costs for an extended period without the short-term ability to pass along those added costs is not reasonable. A balanced approach to changing costs would allow price changes throughout the year, perhaps on 30-day notice. An agreement that allows for termination by only one party disproportionately favors one partner at the expense of another. An agreement that allows one party to terminate the agreement for a broad array of causes or even no cause, while allowing the other party to terminate for a single draconian cause is similarly prejudiced. Be sure to exercise care when drafting the agreement to ensure reasonable balance in the ability of both parties to terminate the agreement. If one party can terminate the agreement for convenience, fairness dictates that the other party has the same ability. Writers of the agreement must remember that the real value of continuing the relationship, not the cleverness and intelligence of the agreement’s author, is the factor that determines the endurance of the relationship.

Four Eyes

When a legal professional and not a seasoned sales manager review a contract, the resulting document can be legally acceptable, but commercially ineffective. When a seasoned sales manager and not an attorney review a contract, the resulting agreement can be commercially effective, but legally unacceptable. Hence, when only two eyes review a value-added reseller 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 eyes. Spending marginally incremental resources on four eyes in lieu of two is akin to the proverbial ounce of prevention.

Conclusion

Manufacturers and value-added resellers need to ensure that a reseller agreement into which they enter is void of lopsided language. A relationship founded on a symmetrical agreement stands a much better chance of growing and developing for a long time. On the other hand, a relationship founded on the inequality of the relative power between two partners is doomed to a premature death. Seeking a balanced agreement is merely a single step that a partner can take to promote the longevity of a reseller partnership. Have the agreement reviewed by both an attorney and a seasoned sales manager.

Glen Balzer, president of New Era Consulting, is a consultant focused on marketing and sales. He advises parties involved with contracts between suppliers, manufacturers’ representatives, value-added resellers, and industrial distributors. He promotes conflict resolution between parties involved in reseller, distributor, and representative agreements. For 30 years, he has been involved with establishing and managing marketing and sales organizations throughout America, Europe, and Asia. Reach him at his website, www.neweraconsulting.com. © 2009 Glen Balzer.