Contract for USA distributor/reseller
Discussion
We've secured a US distributor for one of our products and they should potentially shift quite a few units, which will be good business for us.
However this means setting up a contract, giving them exclusive rights to distribute the product in that market and protecting our interests and theirs. We're only a small company and haven't done anything like this before.
Are there any standardised or template contracts out there for reseller agreements that we should use as a starting point to bounce around between us to get everything written down?
I suspect I'm about to be told to 'lawyer up' but wouldn't know where to start finding someone who will do what we need without pulling my pants down.
However this means setting up a contract, giving them exclusive rights to distribute the product in that market and protecting our interests and theirs. We're only a small company and haven't done anything like this before.
Are there any standardised or template contracts out there for reseller agreements that we should use as a starting point to bounce around between us to get everything written down?
I suspect I'm about to be told to 'lawyer up' but wouldn't know where to start finding someone who will do what we need without pulling my pants down.
Definitely worth getting professional support in some way. Be warned though, you’re likely to get a lot of questions from them about what you want/think the agreement should say.
There’s a lot to consider but, having done this at reasonable scale with both physical and intangible products in the past, the four areas I’d focus on as having landmines that might not be spotted until too late are:
1) Performance - especially how do you determine underperformance and what happens if you do. Exclusivity with an underperforming sales channel isn’t a good combination. Personally, I’d be reluctant to give full US exclusivity until they’ve delivered results in part of it. Huge territory to have locked up with a single player, should be a big investment for both sides to make work, so a pilot region can sometimes make sense.
2) Pricing/positioning - always tricky getting a balance between local and international pricing and brand positioning. Many times have I heard cries from sales people/distis that this customer/market is “special” in some way and the price needs to be bombed accordingly… not necessarily what you want in order to protect margin elsewhere: Equally, depending on the product/market you might need to take a view on how you achieve a level of price stability over time.
3) Marketing/sales support - remember that many in the US market still have a heavy bias towards commission/performance based salesperson compensation. To win in that market you really have to make the sales people want to sell your product instead of any competing alternatives (not just direct alternatives but other things from their portfolio that they may spend their time selling) they may have access to. Part of that will likely come down to direct support, part down to general marketing. It’s broadly linked to the above points but you’ve got to be clear what the offer/expectation is here and who picks up which element of cost.
4) Returns rights (especially if physical and/or perishable stock is involved) - have seen people caught out in a big way by not property defining returns rights. There can be big differences in what gets ordered (and comes back) at product group, line, and SKU levels and you don’t want much (ideally any!) unsalable product coming back. One particular instance springs to mind where returns rights were at a product group level and company was stuck taking back vast quantities of a particular SKU that simply should never have been ordered (or allowed to have been ordered in the quantity taken). There’s obviously various other stuff around d FX (especially if retuned inventory comes back some time after order), customs/duty, etc.
There’s loads of generic commercial stuff but if an adviser/lawyer doesn’t immediately suggest these as things to consider (and ask sensible questions about what is important to you) then I’d seriously question how much they knew about international distribution.
Outside the agreement itself, if you haven’t done so already, think about how you will manage any FX exposures. Some are happy to ride FX variations,,others take a view that that’s not part of their business and will hedge exposures.
There’s a lot to consider but, having done this at reasonable scale with both physical and intangible products in the past, the four areas I’d focus on as having landmines that might not be spotted until too late are:
1) Performance - especially how do you determine underperformance and what happens if you do. Exclusivity with an underperforming sales channel isn’t a good combination. Personally, I’d be reluctant to give full US exclusivity until they’ve delivered results in part of it. Huge territory to have locked up with a single player, should be a big investment for both sides to make work, so a pilot region can sometimes make sense.
2) Pricing/positioning - always tricky getting a balance between local and international pricing and brand positioning. Many times have I heard cries from sales people/distis that this customer/market is “special” in some way and the price needs to be bombed accordingly… not necessarily what you want in order to protect margin elsewhere: Equally, depending on the product/market you might need to take a view on how you achieve a level of price stability over time.
3) Marketing/sales support - remember that many in the US market still have a heavy bias towards commission/performance based salesperson compensation. To win in that market you really have to make the sales people want to sell your product instead of any competing alternatives (not just direct alternatives but other things from their portfolio that they may spend their time selling) they may have access to. Part of that will likely come down to direct support, part down to general marketing. It’s broadly linked to the above points but you’ve got to be clear what the offer/expectation is here and who picks up which element of cost.
4) Returns rights (especially if physical and/or perishable stock is involved) - have seen people caught out in a big way by not property defining returns rights. There can be big differences in what gets ordered (and comes back) at product group, line, and SKU levels and you don’t want much (ideally any!) unsalable product coming back. One particular instance springs to mind where returns rights were at a product group level and company was stuck taking back vast quantities of a particular SKU that simply should never have been ordered (or allowed to have been ordered in the quantity taken). There’s obviously various other stuff around d FX (especially if retuned inventory comes back some time after order), customs/duty, etc.
There’s loads of generic commercial stuff but if an adviser/lawyer doesn’t immediately suggest these as things to consider (and ask sensible questions about what is important to you) then I’d seriously question how much they knew about international distribution.
Outside the agreement itself, if you haven’t done so already, think about how you will manage any FX exposures. Some are happy to ride FX variations,,others take a view that that’s not part of their business and will hedge exposures.
LooneyTunes said:
Definitely worth getting professional support in some way. Be warned though, you’re likely to get a lot of questions from them about what you want/think the agreement should say.
There’s a lot to consider but, having done this at reasonable scale with both physical and intangible products in the past, the four areas I’d focus on as having landmines that might not be spotted until too late are:
1) Performance - especially how do you determine underperformance and what happens if you do. Exclusivity with an underperforming sales channel isn’t a good combination. Personally, I’d be reluctant to give full US exclusivity until they’ve delivered results in part of it. Huge territory to have locked up with a single player, should be a big investment for both sides to make work, so a pilot region can sometimes make sense.
2) Pricing/positioning - always tricky getting a balance between local and international pricing and brand positioning. Many times have I heard cries from sales people/distis that this customer/market is “special” in some way and the price needs to be bombed accordingly… not necessarily what you want in order to protect margin elsewhere: Equally, depending on the product/market you might need to take a view on how you achieve a level of price stability over time.
3) Marketing/sales support - remember that many in the US market still have a heavy bias towards commission/performance based salesperson compensation. To win in that market you really have to make the sales people want to sell your product instead of any competing alternatives (not just direct alternatives but other things from their portfolio that they may spend their time selling) they may have access to. Part of that will likely come down to direct support, part down to general marketing. It’s broadly linked to the above points but you’ve got to be clear what the offer/expectation is here and who picks up which element of cost.
4) Returns rights (especially if physical and/or perishable stock is involved) - have seen people caught out in a big way by not property defining returns rights. There can be big differences in what gets ordered (and comes back) at product group, line, and SKU levels and you don’t want much (ideally any!) unsalable product coming back. One particular instance springs to mind where returns rights were at a product group level and company was stuck taking back vast quantities of a particular SKU that simply should never have been ordered (or allowed to have been ordered in the quantity taken). There’s obviously various other stuff around d FX (especially if retuned inventory comes back some time after order), customs/duty, etc.
There’s loads of generic commercial stuff but if an adviser/lawyer doesn’t immediately suggest these as things to consider (and ask sensible questions about what is important to you) then I’d seriously question how much they knew about international distribution.
Outside the agreement itself, if you haven’t done so already, think about how you will manage any FX exposures. Some are happy to ride FX variations,,others take a view that that’s not part of their business and will hedge exposures.
Thank you, all very good points. We have virtually no representation in the US currently so not concerned about them having the whole territory. From the conversations we've had up to this point we can see that their attitude to marketing is quite different to the UK/Europe. There’s a lot to consider but, having done this at reasonable scale with both physical and intangible products in the past, the four areas I’d focus on as having landmines that might not be spotted until too late are:
1) Performance - especially how do you determine underperformance and what happens if you do. Exclusivity with an underperforming sales channel isn’t a good combination. Personally, I’d be reluctant to give full US exclusivity until they’ve delivered results in part of it. Huge territory to have locked up with a single player, should be a big investment for both sides to make work, so a pilot region can sometimes make sense.
2) Pricing/positioning - always tricky getting a balance between local and international pricing and brand positioning. Many times have I heard cries from sales people/distis that this customer/market is “special” in some way and the price needs to be bombed accordingly… not necessarily what you want in order to protect margin elsewhere: Equally, depending on the product/market you might need to take a view on how you achieve a level of price stability over time.
3) Marketing/sales support - remember that many in the US market still have a heavy bias towards commission/performance based salesperson compensation. To win in that market you really have to make the sales people want to sell your product instead of any competing alternatives (not just direct alternatives but other things from their portfolio that they may spend their time selling) they may have access to. Part of that will likely come down to direct support, part down to general marketing. It’s broadly linked to the above points but you’ve got to be clear what the offer/expectation is here and who picks up which element of cost.
4) Returns rights (especially if physical and/or perishable stock is involved) - have seen people caught out in a big way by not property defining returns rights. There can be big differences in what gets ordered (and comes back) at product group, line, and SKU levels and you don’t want much (ideally any!) unsalable product coming back. One particular instance springs to mind where returns rights were at a product group level and company was stuck taking back vast quantities of a particular SKU that simply should never have been ordered (or allowed to have been ordered in the quantity taken). There’s obviously various other stuff around d FX (especially if retuned inventory comes back some time after order), customs/duty, etc.
There’s loads of generic commercial stuff but if an adviser/lawyer doesn’t immediately suggest these as things to consider (and ask sensible questions about what is important to you) then I’d seriously question how much they knew about international distribution.
Outside the agreement itself, if you haven’t done so already, think about how you will manage any FX exposures. Some are happy to ride FX variations,,others take a view that that’s not part of their business and will hedge exposures.
Apart from chamber of commerce, where would you recommend we go to find a suitable lawyer/adviser?
(Un)fortunately mine were all done in house but would suggest that a mid-size regional law firm should be able to help if they've got a good commercial practice. They should be open to saying if it's the sort of work they've done before and whether your industry is one they have live clients in.
You'll probably be able to save a bit of money by having clear "heads of terms" agreed before any detailed drafting takes place but can be worth your lawyers reviewing these before you put them to the other party (so that you don't need to row back from any).
You'll probably be able to save a bit of money by having clear "heads of terms" agreed before any detailed drafting takes place but can be worth your lawyers reviewing these before you put them to the other party (so that you don't need to row back from any).
red_five said:
We have virtually no representation in the US currently so not concerned about them having the whole territory.
Depending on the product, do think carefully about this. It's much easier to expand a distribution territory if/when someone does well, but harder to take it away again if you suspect, but can't prove (to the extent needed in the contract), they're not delivering well. A bit of competitive tension can be helpful in keeping distis on their toes, especially if the product is attractive.I know this will go against the grain but we work in a fairly specialised market place and represent various overseas manufacturers here in the UK and also have our own product lines which we also sell into Europe. We do not have any formal, legal contracts for any of this and the company has been trading this way for well over 60 years, still with a couple of our original suppliers and customers.
Distribution agreements like this are done on trust, when the trust goes, the agreement goes and whilst every situation has its ups and downs, you either work through it together or give up.
We are currently setting up a sole distributor in the US, it's a firm we have dealt with off and on for the last ten years and they really want to sell a newish product range of ours. I have no qualms about letting them have a go, if it works out then great, if it doesn't, well nothing ventured.
We have told them how much we would like them to sell in the first year, not over ambitious numbers. As we have given them sole rights they are happy to organise US marketing and ads. We have also said we won't get involved in warranty etc, they can build that into their pricing and they are happy with that. Luckily UK/EU testing and standards cross over very easily to the US versions so that was easy to fix. The only thing we have done formally is to set up some NA product liability insurance, just in case and we have always held the trade marks.
I guess it just depends on the kind of relationships you build up with the companies you do business with.
Distribution agreements like this are done on trust, when the trust goes, the agreement goes and whilst every situation has its ups and downs, you either work through it together or give up.
We are currently setting up a sole distributor in the US, it's a firm we have dealt with off and on for the last ten years and they really want to sell a newish product range of ours. I have no qualms about letting them have a go, if it works out then great, if it doesn't, well nothing ventured.
We have told them how much we would like them to sell in the first year, not over ambitious numbers. As we have given them sole rights they are happy to organise US marketing and ads. We have also said we won't get involved in warranty etc, they can build that into their pricing and they are happy with that. Luckily UK/EU testing and standards cross over very easily to the US versions so that was easy to fix. The only thing we have done formally is to set up some NA product liability insurance, just in case and we have always held the trade marks.
I guess it just depends on the kind of relationships you build up with the companies you do business with.
Ean218 said:
when the trust goes, the agreement goes
That’s pretty much the reality for most business relationships. As soon as people start quoting the contract at each other they might as well move on. But having some degree of expectation setting and the ability to more cleanly break away can be sensible. Why not turn this on its head?
I have never in 35 years in business found a solicitor worth anything to MY business. they are very good at sending fee notes and covering their bottoms.
I fly to my distributors. I ask them to draw up a simple contract that keeps them happy. If I am happy I sign it.
We then both sell stuff, which is whats its all about really. Its served me well.
Distributors are your life blood.
I have never in 35 years in business found a solicitor worth anything to MY business. they are very good at sending fee notes and covering their bottoms.
I fly to my distributors. I ask them to draw up a simple contract that keeps them happy. If I am happy I sign it.
We then both sell stuff, which is whats its all about really. Its served me well.
Distributors are your life blood.
Ean218 said:
I know this will go against the grain but we work in a fairly specialised market place and represent various overseas manufacturers here in the UK and also have our own product lines which we also sell into Europe. We do not have any formal, legal contracts for any of this and the company has been trading this way for well over 60 years, still with a couple of our original suppliers and customers.
Distribution agreements like this are done on trust, when the trust goes, the agreement goes and whilst every situation has its ups and downs, you either work through it together or give up.
That's a noble principle, but one that doesn''t always work across all cultures.Distribution agreements like this are done on trust, when the trust goes, the agreement goes and whilst every situation has its ups and downs, you either work through it together or give up.
Having worked with businesses in a variety of countries, I've found that agreements in places like Europe, the Middle East and Asia, are usually done on a handshake, with both parties understanding the spirit of the deal. Contracts are just considered a formality and left to the lawyers. In most cases, both parties would consider it dishourable to exploit the lettter of the law in a contract to get one over on the other.
My experience with the US is different though. Any loophole in a contract, that might give one party an advanage, even if it breaks the spirit of the deal, will be happily exploited and seen as fair game. I think it's cultural more than malice, and appears that the difference is that whilst many cultures strive to negotiate win/win deals, the US tends to treat it more like conflict, where winning is the goal, even if it means the other side loses.
That's not to say that all Americans and US businesses are like that, but I soon learned to read US contracts very carefully to ensure there were no potential traps or unintended loopholes that could be exploited later.
I did this back in 2002 with pretty much the same thoughts as yourself (what do I have to lose) we have no market share and they had representation in every state. I would have signed virtually regardless it was huge potential for us.
Fast forward six years and they were not able to generate the sales they promised and started to talk about buying us out. This wasn't going down well with me. It felt like they set me up. We eventually agreed in 2016 to buy ourselves out of their agreement.
I would be very surprised if they will entertain a handshake of trust.
My experience would tell me to define territories within their territory and have the sales data for these territories monthly / quarterly. You may well find they are pretty active on the east coat and mid west but very little sales in pacific west (for instance). This will allow you to remove the "territories" where they are not performing should this happen and reassign them to a competitor or represent yourself when you are in a position to do so should you choose.
Without this how do you know how they are performing.
You will then have their sales data and be able to remove the territories.
I strongly advise you not to give North America away without some mechanism of removing the distributer if they do not perform.
California alone is now our largest sales territory worldwide. Our distributer back then only sold into the mid west. I would never have know this until we bought them out. With sales data I could have removed California from them instead of buying it back.
Food for thought for you.
Fast forward six years and they were not able to generate the sales they promised and started to talk about buying us out. This wasn't going down well with me. It felt like they set me up. We eventually agreed in 2016 to buy ourselves out of their agreement.
I would be very surprised if they will entertain a handshake of trust.
My experience would tell me to define territories within their territory and have the sales data for these territories monthly / quarterly. You may well find they are pretty active on the east coat and mid west but very little sales in pacific west (for instance). This will allow you to remove the "territories" where they are not performing should this happen and reassign them to a competitor or represent yourself when you are in a position to do so should you choose.
Without this how do you know how they are performing.
You will then have their sales data and be able to remove the territories.
I strongly advise you not to give North America away without some mechanism of removing the distributer if they do not perform.
California alone is now our largest sales territory worldwide. Our distributer back then only sold into the mid west. I would never have know this until we bought them out. With sales data I could have removed California from them instead of buying it back.
Food for thought for you.
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