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Negotiating A Distribution Agreement

Hi, I am the CEO of a start-up and came across your website. We are in talks with a Distributor about selling our product but have many issues concerning giving them Exclusivity for OEM and Aftermarket and whether they should pay a startup fee... Our tech product is new in this market and new in general (MVP hardware just now ready) This product has strong potential in the market and I've given the Distributor most favorable pricing...but we have yet to sign the Agreement. Should I require an up-front fee for the Exclusivity and for what Term? Also, what if they don't "perform" over the given Term? Thanks, Tom

Answers

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

These terms can burn you if you try to sell the company. Be really careful. I would get advice from counsel here and be sure to ask how the wording may look in an M&A transaction. Ask someone who works with M&A all the time.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Some ideas:
a) give a geographic exclusivity,
b) have sales projections that have to be met or they loose their exclusivity (not dealership),
c) if they want exclusivity, why not get a start-up fee where some of it is given back if meet some KPI

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

I really have serious reservations about exclusivity and startups (especially in hardware). I really think that they do NOT work together well.

Think about it from this point of view, as a startup. you want to have control of your fate/traction/growth and you would want it available through all the channels you can get. Exclusivity means you are handing over "control" and your growth/fate to the distributor (whether it be geographical or vertical). One wrong move by the distributor (in presenting the product, in maintenance, in installation, etc) could mean a disaster for you or set you back as far as your growth timetable goes.

This does NOT say that I am against it. Just that (as per previous comments, and I am sure alot are still going to be recommended), you have to put in soooo many safeguards/controls and dependent on the reputation/type of company that you are dealing with that it makes it LESS enticing (for me) as an option. It may or may not work out. But the main question is, do you trust them enough to determine the fate of your company? What price tag do you place on that trust for your "start-up fee" ? Are their STRENGTHS in (penetrating) the market offset and warrant the exclusivity? If you were not a startup, I can see the benefits of entering into exclusive distribution contracts.

I am sure that others will recommend options for safeguards, controls and terms on the distribution contract, I just want to express my general perspective on the matter.

As a P.S., think about this.....why did Tesla opt for their own distribution and not deal with dealers? The main reason is inefficiency in the system and the second reason is control.

Thomas Roberts
Title: Senior Software Developer
Company: Spearstone, LLC
(Senior Software Developer, Spearstone, LLC) |

The distributor is well established and reputable in the market I would be giving them exclusivity in. The product has strong promise in other markets, but will need to mature before entering those.

I like the idea of a start-up fee to cover the cost of, say, the first 100 MVPs (Rev. 1 product) and some given back if they meet a certain KPI or quota??
Should the Term be 1 year, 2yrs??

They would be doing the marketing and trade shows and I would work closing with them to insure product training and maintenance...good points.

Mike Adhikari
Title: Owner
Company:
(Owner, ) |

Distributor may want exclusivity b/c they have a) high start-up cost at their end, b) they are taking the risk of working through the bugs and market acceptance, or c) the product is hot, and they think they are helping you build the brand.
So consider distributor perspective in negotiating.

From your perspective, you do not want get hand-cuffed. So possibilities are a) time exclusivity, b) volume performance, c) upfront cash for the order for x-months(not a start-up fee), d) easy return policy, e) exclusivity for some, not all, products, f) geographic exclusivity, g) higher discount, h) stretched payment terms, etc. (there are many ways to skin this cat.)

An actual example: few years ago, one start-up company (very advanced WiFi routers) signed, with a large distributor, an exclusive agreement with minimum annual purchase requirement. The distributor did not buy anything during the year. Then he placed an order in December for the minimum quantity and claimed that he had performed as required. The company had no choice but to continue the exclusive contract for the second year. The start-up company had cash flow problems for the whole year and further, had to deliver one year worth of units in a short period. That caused quality problems (and technically their delivery time exceeded that in the contract). The distributor did not place orders in the second year claiming quality issues. This whole thing was a mess. The company had to buy-back the exclusive contract from the distributor for a significant amount.

I think one should make a fair business like agreement rather than getting involved in a lengthy legal contract.

Thomas Roberts
Title: Senior Software Developer
Company: Spearstone, LLC
(Senior Software Developer, Spearstone, LLC) |

What if we delay giving Exclusivity (call it a trial period)....gives us time to verify their marketing methods and trade show performance, and gives them time to "prove" the product is viable and mature.

So, we say in the contract, that they pay $xx up front for the purchase of X modules and we state that we will revisit Exclusivity/Pricing, etc. in X months...

Or, we give Exclusivity for 3 months only, then re-evaluate...

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

Thomas,

I reiterate my previous comment. That being said, Here are a few more questions...(that only you can answer)

1. If you are confident that they are reputable and well established, why the need for a "trial period" or "3 month exclusivity"? (Sorry to guide you to a circular logic).

2. What is it that they can do (and do well) that you can't? Is the performance of what they can do (that you can't) time or amount of capital related? << this is a major question for me

3. Is 3 months really enough time? What do you think is the length of your sales cycle? (I know of some products/startups that had their first sale after 6 months of grinding.)

Hopefully my questions will guide you to a better decision. Good luck.

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

What about EARNING their exclusivity. If they hit milestones, you can talk about exclusivity.

Thomas Roberts
Title: Senior Software Developer
Company: Spearstone, LLC
(Senior Software Developer, Spearstone, LLC) |

Emerson,
This is a good idea and I am considering exactly that. In addition, another possibility is to give them exclusivity for 6 mos. This way, it gives us both a trial/demo period to see if there are any major issues in the relationship or market.
All while the product matures and long run costs and pricing become clear.

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

Good luck Thomas. Let me know if I can be of more help. Don't hesitate to reach out through Proformative's message system or through LinkedIn.

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