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Exclusive Distribution Licensing Fee RATES - Analytical Equipment

I am reaching out to fellow members who may have experience in the determination of the amount/rate for Exclusive Distribution Licensing Fees (and maybe some possible contract/agreement structures) for Analytical Equipments (1 product with multiple industry applications).

Is it more or less a "industry/market" practiced going rate?...and what is it? If so, is there something I can do to support the rate/fee aside from saying it is the market rate? We have some leeway on the price and may tweak the numbers through price. However, since this is our first foray in distributorship, we just want to present a fair deal. 

The prospect distributor is just finishing up the testing of our equipment and we will soon enter the negotiation phase. The distributor wants to retain exclusivity on an initial 3 verticals and is open to introducing our product to 4 more verticals. 

Any other issues that I (as the CFO) should consider?

Thanks in advance!

Emerson

Answers

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

Let me try to parse the question: Your company manufactures analytical devices. You are considering partnering with a distributor, who will sell your devices into a reseller channel. The distributor wants exclusivity for three identified vertical markets.

Assuming I have that right, there are a few things to consider:

1. How big is the distributor? How much market share do they have?

2. Where are you on your revenue ramp? Is this an early stage company coming out with its first products or are we looking at a mature company that's decided to move away from a direct model to an indirect distribution model? Or, are you in growth mode and have decided to increase your reach to resellers by adding a distribution channel layer?

3. What do your margins look like? If you're operating at 70% GM, you can give up a lot more margin than if you're operating at 20% GM.

4. What is the distributor's business model? What's their average gross margin in the sector in which you operate? What are reseller margins? If you don't know, you may want to ask. Or, ask your head of marketing. He/she should be living/breathing that information.

5. How many distributors service your industry? Where does this distributor rank, either as a specialist or as a generalist?

6. How many distributors are you hoping to engage over the next several years? Do they all compete in the same verticals or are they typically specialists with little overlap?

7. What's your company's intermediate-term and long-term channel strategy? Are you planning on ultimately engaging most of the distributors in your sector or does your firm expect to keep the breadth of its distribution partnerships fairly narrow?

8. What is the distributor intending to do to earn exclusivity? Will they be investing their own marketing funds to develop the exclusive verticals? Will they invest in non-exclusive verticals?

When entering an unfamiliar territory, limited-term exclusivity agreements make sense, but only when the distributor commits to investing their own resources to achieve success. The more you are expected to pay, the less justification for exclusivity.

However, when entering your home territory, which is what I think you're describing, exclusivity only makes sense if the distributor is truly a market maker. If that does not describe the company you're negotiating with, you'd be well advised to push back. If yours is a commodity product or if you are operating in what is essentially a commodity market, if you believe that exclusivity in your home market can't be avoided, it should be kept short (one year) and there needs to be a tangible price paid by the distributor for the right. Make sure they commit their own outbound sales and marketing resources to drive growth.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Robert,

Thank you for the response and highly appreciated. You are correct on your assumptions/reading...I forgot to say that the distributor is also an END USER.. For the most part, we are already considering the points you have enumerated. ....and yes, the distributor/user is a market maker.

Our problem really is how much exclusive distribution licensing fee we can propose. (that is assuming we arrive at a decision to ask them for it). Frankly, with the amount of business they have the potential to generate (as an end user and as a distributor), and the potential goodwill it can generate for the company, the exclusivity fee may be insignificant (in my opinion). We can also structure a deal in such a way that, we can ask for a higher guaranteed unit numbers in lieu of the exclusivity fee. That is of course I can get the $$/rate of the fee so I can plug it into a decision matrix. I am also thinking of the possibility of a sliding scale fee rate based on the number of units they sell. The problem with this (as I see it) is I end up with NOT knowing what rate or dollar amount to start it with again. For example.....1% for a particular range of number of units....0.75% for the next.

It is a high (close to 70%) GM product and like I said, we can play around with the pricing if need be.

I can connect with you offline if that is okay with you.

Thanks again!

Emerson

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