Debunking the Top Ten Myths About International Distribution Agreements
[Editor’s note: There are lots of articles out there about the benefits of exporting. The art of negotiating a contract with an international distributor, however, isn’t discussed much. This is the first in a series of ten articles debunking some common misconceptions about these agreements, from a lawyer who has negotiated hundreds of crossborder agreements involving distributors in more than 75 countries.]
A sink manufacturer met a potential Saudi distributor at a Dubai trade show. The distributor was wildly enthusiastic about the supplier’s products. The distributor claimed to have lots of connections to major Saudi construction projects, and the two companies quickly agreed to a handshake exclusive distribution arrangement.
The distributor placed a couple of orders and was calling frequently, asking for special pricing, rush fabrication, expedited shipping, and a variety of other one-off requests. The manufacturer refused most of these, and pretty soon, the calls—and the orders—stopped coming.
It turned out, after considerable back and forth, that the two companies wanted very different things. The manufacturer wanted a company that would just go out and sell the products within certain price and delivery constraints—a transactional relationship. The distributor, on the other hand, wanted a partnership—a manufacturer who would work closely with them to meet and rapidly-changing demands of the local marketplace.
How did things get so far off track? One key reason: the parties never took the time to really set out in writing and agree on all their expectations.
The art of reaching true agreement with a foreign distributor is a delicate dance. At the beginning, the relationship is full of possibilities and enthusiasm. Both companies want to reach agreement and get down to the business of selling things as soon as possible. Many companies will only do a legal agreement if their legal department insists on it, and if they don’t have a legal department, it probably won’t happen.
Even companies with written agreements may think of the contract as something to be done at the end of the negotiations—a necessary evil to tidy up the little details, but that delays getting on with the business at hand.
But they’re missing a great opportunity: the contract negotiation process ensures the parties truly have clarity and consensus, and as an added benefit, builds the all-important relationship between supplier and distributor.
There are many things that companies that come from the same or similar cultures take for granted in a negotiation that simply cannot be assumed when negotiating across cultures. Between 60 percent and 80 percent of crossborder deals fail to meet financial expectations. The main culprit: cultural disconnects. International distribution agreements are no different.
The real issues often lie under the surface like an iceberg. The parties often talk past each other in crossborder negotiations. Basic terms that seem self-evident become points of lengthy negotiation. Discussions get stuck on issues the other considers silly. Things often take much longer because of these, as well as differing perceptions of time and approaches to negotiation.
Through the contract negotiation process, a good international lawyer helps reveal gaps in understanding that are never an issue in domestic negotiations, and coaches and guides the parties to a better partnership. Working through small conflicts as part of the negotiation builds trust as they gain confidence they can successfully work through inevitable disagreements.
The contract negotiation is also a last opportunity to make sure you really want to do business together. It’s OK if you don’t—it’s better to find this out before you both spend lots of time and resources trying to make a doomed relationship work!
A couple of good practices:
Use a customized checklist or bulleted term sheet for each kind of business and products/services involved, so that the business team addresses these before working on the contract. It’s easy to then telescope the term sheet into a contract form, provided the term sheets are sufficiently detailed.
Listen carefully to the partner’s pain points. Look for messages beneath what is said. Often one or both parties fear ceding too much control, and trust is usually built over a relatively long time period.
Don’t hesitate to bring in a bi-cultural expert or experienced outsider to help move the parties through difficult patches.
Take the time to negotiate a good written agreement. Otherwise, you’ll waste a lot of time—your most valuable resource—with foreign distributors that just don’t see things the way you do.
Doris Nagel is principal and founder of Blue Sky Consulting (www.blueskyconsultingservices.com), and has 25+ years of hands-on global experience, focusing on strategic partnering, market entry strategy, compliance, training, and risk management. She’s a frequent speaker and author, and is currently working on a book on international distributor networks.