Balance is beautiful

A balanced distribution agreement pays dividends

by Glen Balzer

Equality between distributor and supplier is the hallmark of a sound distribution agreement. Balanced agreements survive longer than those where one partner is favored over another due to clever terms and conditions. The longest living agreements are simple, easily understood, and even-handed. Distribution partnerships that are based upon imbalanced agreements and clever wording often expire prematurely. Sound agreements need not be clever, but must demonstrate evenhandedness and balance.

Imbalance enters the agreement
Relationships and agreements between distributors and manufacturers ultimately expire. That expiration may be amicable, whereby both parties move ahead in different directions. Upon disengagement, the distributor engages with an established and enthusiastic supplier, the manufacturer creates a relationship with a distributor of great promise. Parting company with a former partner in a distributor agreement, however, may become acrimonious and demand help from an attorney.

In many cases where a distribution relationship ends in a legal dispute, the distributor agreement was crafted in a way that did not treat both parties equally. One-way agreements are created by a partner that may be relatively inexperienced with drafting distributor agreements. An attempt is sometimes made to stack advantages toward one side of the partnership to make it a better deal for one partner than for the other. One partner becomes too clever attempting to its make life better by exploiting the inexperience of the other partner. Such exploitation works against the longevity of a distribution partnership.

Seasoned distribution partners understand through experience that unbalanced wording does not serve the purpose of long-lasting partnerships. The objective of drafting imbalance into an agreement is generally to increase the advantages of one partner over the other. Unfortunately, imbalance ultimately leads to strained relationships and legal skirmishes, not to great relationships and optimal business results.

The real objectives of a partnership between a distributor and a supplier are greater sales, improved market share, and better profit margins. The objective should never be a list of advantages in an agreement of one partner over another. Resolution of imbalanced agreements regrettably quite often involves costly and time-consuming litigation.

Value vs. terms and conditions
Cleverly crafted words and phrases in a distribution agreement rarely extend the life of a partnership between a distributor and a manufacturer. A partnership lives only so long as both partners believe there is a benefit to a continuing relationship. Once perceived value erodes, the partnership is finished, followed closely by the expiration or termination of the agreement.

Executives signing a distribution agreement are generally optimistic about the partnership being launched. No one involved with the creation of an agreement looks forward to its demise. The premature expiration of a relationship between a distributor and a supplier might be disappointing. A legal dispute arising from the disengagement of the partners should be avoided. The breakup of a partnership, however, is not necessarily an incorrect course of action.

When a distribution partnership unwinds, both parties have a choice of focusing on their own respective business and attendant customers, or spending management time and company resources on a legal dispute that will still result in the dissolution of the distribution agreement. Executive time, management attention and financial resources allocated to a legal dispute represent a shift of focus away from the business and away from customers. Since unbalanced agreements more frequently result in a legal scuffle, striving to craft a well-balanced distributor agreement is worth the effort.

An ounce of preventive energy striving to draft a balanced agreement pays real dividends when litigation, legal fees and damage awards can be avoided. A balanced distribution agreement really is beautiful.

Examples
Agreements containing clever phrases and clauses that afford greater power to one partner over another are asymmetric. Agreements that are crafted in an unbalanced fashion tend to expire more quickly than those that are written with an objective of balancing the relative power of both parties. Partners in an unbalanced distribution agreement might be satisfied during periods when the metrics are favorable: rising sales, increasing market share and climbing profit margins. However, all metrics rise and fall over time. A time-tested partnership might weather declining metrics occasionally. But, if metrics are poor for an extended period of time, one or both parties may seek an exit from the agreement. Problems with an imbalanced agreement usually surface when performance declines or when one or both parties begin to think about terminating the agreement.

An agreement that allows for price adjustments to occur only once per year is unbalanced. A manufacturer must confront changing costs throughout the year. To expect the manufacturer to endure rising costs for an extended period of time without the short-term ability to pass along those added costs is not reasonable. A balanced approach to changing costs would allow for price changes to be made throughout the year, perhaps on a 30-day or 60-day notice.

An agreement that allows for termination by only one party is unbalanced. An agreement that allows one party to terminate the agreement for a number of alternative causes while allowing the other party to terminate for a single draconian cause is equally unbalanced.

Exercise care when drafting the agreement to ensure reasonable balance in the ability of both parties to terminate the agreement.

If one party can terminate the agreement for convenience, balance dictates that the other party may do the same. Writers of the agreement must remember that the perceived value of continuing the relationship by both parties, not the cleverness and intelligence of the author, is the factor that determines the endurance of the distribution partnership.

Conclusion
Distributors and manufacturers need to ensure that any distributor agreement into which they enter is void of one-way language. A relationship founded on a symmetrical agreement stands a much better chance of growing and developing for a long time. A relationship founded on the inequality of the relative power between two partners, on the other hand, is doomed to a premature conclusion. Seeking a balanced agreement is merely a single step that a partner can take to promote the longevity of a distribution agreement and partnership.

This article originally appeared in the January/February 2008 issue of Progressive Distributor. Copyright 2008.

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