Debunking The Top Ten Myths About International Distribution Agreements
A specialty foods company was locked in negotiations with a Swedish distributor. They went back and forth on terms for months. The discussions were getting increasingly acrimonious, and most of the original goodwill between the parties had disappeared. There was always some new issue on the table, or worse, old issues cropped up in a new form.
More than a year later, they signed a contract, only to find new issues continued to crop up frequently. Eventually, with few sales to show for their enormous investment of time and resources, the distributor terminated the relationship.
Two key morals to this story: (1) always know your walk-away point, both with respect to important terms in the contract, but also whether the relationship is ultimately worth pursuing. and (2) closely related, is to always have Plan B.
Whether in contract negotiations or in a long-term business relationship, human psychology is definitely at work. Both companies often feel like they’ve invested so much already that they need to slog through and finish the negotiation or continue the relationship.
A contract negotiation is not the ultimate necessary conclusion—it is simply the last chance both parties have to make sure they really are right for a business partnership. If the contract negotiations are very difficult and too frustrating, it may be a strong signal that you either have the wrong partner, or (and companies hate to admit this one!), or they simply do not have the skills (or patience, or mindset—whatever you want to call it) to be successful in that particular market or with that particular partner.
If the contract negotiations are that frustrating while still in the honeymoon phase, you should worry that the ongoing relationship might be at least—if not more—difficult.
This same advice applies throughout your distributor relationship. All too often, suppliers keep distributors around whose poor results suggest they should be replaced. If you are clear about your exit strategy (even if that strategy evolves over time), it will guide you to a decision about whether it’s time to put in place a direct sales force, find a new distributor, or leave a market altogether if certain results aren’t met over a specific time.
Similarly, having a backup plan (again, it’s OK if that plan morphs over time) helps you keep you’re your walk-away point clearly in focus. If you don’t have Plan B, human psychology again will come into play, and you’re likely to settle for sub-par results because making change is hard and requires focus.
Having Plan B is especially important in emerging markets. Huge currency fluctuations, political unrest, and sudden regulatory changes can happen, and the market that was once attractive no longer is. But it’s also important almost everywhere in today’s business environment, where technology changes, mergers and acquisitions, and factors have accelerated the pace of change. Being flexible and adaptable is one of the most important attributes for success in global markets.
Your distribution business will be more successful if you always keep your walkaway point in mind, and know when it’s time to pull the plug, regardless of the investment made already—that’s a sunk cost that can’t be recovered. Know when you want to exit, and how you want to exit by being prepared with a backup plan.
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 final installment of a series of ten articles on Debunking The Top Ten Myths About International Distribution Agreements. Check out the previous articles in the series:
Trade Finance Constraints Harmful to SMEs