Don’t Ignore that Distribution Agreement

Managers often pay little attention to details when negotiating distribution agreements, and understandably so: Such oversight seldom leads to any problems.

Unless, of course, the distribution relationship unwinds. That’s when hidden errors can cause major headaches for suppliers and distributors alike.

After negotiating distribution agreements for several years—both as a supplier and distributor—I have learned how to avoid problems with the language found in those contracts. In recent years, I have spent much of my time as a forensic consultant in litigation between suppliers and distributors.

While in industry, I had the benefit of a corporate legal department to support my efforts to negotiate contracts with manufacturers’ representatives, distributors, value-added resellers, and suppliers. My forensic experience brought me into situations where there was real conflict between suppliers and their distribution partners that led to litigation.

Upon conclusion of every forensic case in which I have engaged, I have had the opportunity to search for the causes that led the parties concerned to feel that they needed to resolve their conflict in a courtroom.

The fact of the matter is, litigation sucks energy out of any company’s management team. It deflects focus away from managing the business. And legal conflict sometimes imposes tremendous financial and opportunity costs on one or both of the parties.

How to avoid this scenario? My experience has taught me two important lessons:

First, the leading cause of the premature unwinding of a relationship between supplier and distributor is lack of due diligence performed prior to signing the contract. Hence, due diligence is among the most important activity a supplier or distributor can engage in prior to signing a distribution agreement.

Second, the root cause that leads suppliers and distributors into litigation upon termination is often a poorly worded distribution agreement. Most of the time, litigation could be avoided with better construction of the contract.

Most distribution agreements benefit from review by people experienced with creating and negotiating contracts. Sometimes attorneys review the contracts. Sometimes sales managers with distribution agreement experience handle the task. The best results come when a both legal professional and a seasoned sales manager review distribution agreements simultaneously.

Why? 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 sales channel agreement, problems can arise. When four eyes review an agreement, however, the probability of a legal skirmish upon termination diminishes greatly.

Ultimately, spending marginally incremental resources on four eyes in lieu of two is akin to the proverbial ounce of prevention.

Glen Balzer is president of New Era Consulting, a California-based marketing and sales consulting firm. He can be reached via his Website at www.neweraconsulting.com.