Debunking The Top Ten Myths About International Distribution Agreements
No one (except, of course, the lawyers) want to think about how to end a relationship when it is only just beginning and full of promise. However, most agreements eventually end, and that’s why it’s worth spending time thinking about termination—especially while the relationship is amicable.
That way you can avoid the problems that a medical device manufacturer encountered when it finally terminated its distributor in Brazil. The company found out that the distributor had registered the products there, and that the new distributor would have to re-register—a process that would take nearly a year. They tried to get the old distributor to help expedite this by asking them to share the files and work with the new distributor to smooth the transition. Not surprisingly, the relationship had already soured, and the old distributor refused, and even stopped communicating.
Furthermore, the old distributor dumped all their inventory on the market at super-discounted prices, and said negative things about the manufacturer to local customers and government officials. And they refused to pay most of their receivables. The result: the manufacturer was effectively shut out of the Brazilian market for several years, and suffered very costly write-offs and sales declines. Their brand in Brazil was severely damaged.
If this company had thought more carefully about termination when they were setting up the relationship in the first place, they might have avoided some of these issues.
You should always plan for termination in the context of how you would transition to a different distributor or your own stand-alone sales office. (It’s always easier to torch and run from the market, but the reality is that you should think hard about entering a market if you think that’s how it will end.)
Goodwill payments. Make sure you clearly understand any goodwill payments that may be due on termination. Think about how long-term customer contracts and government tenders should be managed to avoid disruption to the customer.
Inventory. Think through how the distributor’s existing inventory should be handled. It’s easy to think, “They bought it, so let them find a way to get rid of it.” The problem is that they will drop the price, making it very difficult for your new distributor or your new sales team. Leaving the old distributor to pick up all the pieces usually doesn’t make for a smooth transition plan. Consider buying back some or all the inventory (other than maybe excess no-move inventory) to essentially buy their goodwill so that your brand isn’t ruined.
Product registrations and other key files. If you’re in a highly-regulated industry, think through how all the registration documents and files should be handed over. This can significantly shorten your new partner’s time to market, and may be worth a generous payment to your old distributor.
Customers. Ultimately, protecting your brand is about making sure the end customers are happy or at least accommodated. Agreeing that your distributor will provide a list of customers and key contract terms will allow a much smoother termination.
In today’s uber-connected global economy, the scorched-earth exit is seldom the best option, and can have unintended consequences and ripple effects (such as having your old distributor’s inventory appear in other markets, or bad online reviews).
Most companies have invested too much in building and protecting their brand to allow a distributor termination to get truly ugly. Planning for termination in the contract, along with building in a financial cushion to perhaps buy the old distributor’s cooperation often just makes good business sense.
Doris Nagel is managing partner of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Get a free excerpt from the book here.
Editor’s note: This is the eighth in a series of articles on Debunking The Top Ten Myths About International Distribution Agreements. Check out the previous articles in the series:
The Shifting US-China Trade Landscape