For over 16 years, Harris Gomez Group has been assisting foreign companies with their investments in Latin America. We often meet companies that are very prudent in their home country when selecting partners, but for some reason, once in a foreign market, they occasionally make mistakes. Maybe it is the short time frame many companies have to find a suitable partner or the fact that they are in an unfamiliar country with a different language.
Regardless, when it comes to a distributor agreement, there are many aspects that go into the creation of it. Often, any mistakes that are made are almost invisible until the end of a distribution partnership. In order to avoid problems, you should follow some practical tips and have a good handle on the agreement from the very beginning to ensure the relationship is successful.
This week we have a chosen to focus on a few common mistakes to avoid when drafting your next distributor agreement.
Giving Too Much
Every new partnership between a distributor and a manufacturer is born in a period of bright optimism. All the parties involved are excited about the new relationship which often leads to giving too much, too fast.
It is common for companies to fly into the Region, meet a few potential distributors, and leave a few days later with an agreement that covers multiple countries in hand. What many do not realize is that mine sites in countries like Peru and Chile are spread out geographically. It is very difficult for one distributor to cover the whole country properly.
Distributors that are successful are on site frequently and the only way to do that is to focus on specific mines. Often it better to have multiple distributors in each country that focus on specific areas. When agreeing on a territory, it is better to assign something that is not too large initially. We recommend starting with the distributor's proven territory and expand the territory gradually as the distributor proves themselves.
Exclusive or Non-Exclusive
We often see distributors who demand an exclusive territory, arguing that without it, they have no incentive to allocate resources toward developing sales for the manufacturer. By assigning exclusivity in a territory, it requires the supplier to make an unnecessary leap of faith with someone they are just starting a relationship with.
One alternative is to draft the distribution agreement in such a way that the distributor is non-exclusive but providing them exclusivity over smaller, manageable, territories. This needs to be supported by placing realistic goals and targets on the distributor.
The idea is not too put all your eggs in one basket until you have solid evidence that the distributor will perform as expected.
- Do your homework – Foreigners are very trusting. Just because the distributor speaks English does not necessarily mean they are being completely upfront about their abilities. Speak with end clients, speak with other companies they represent, speak with former employees, etc. This is an important step that takes time but will save you heartache.
- Larger does not always mean better – Understand that the more products the company represents, the less time they will focus on selling your product. Smaller companies with good relationships at a site level will often get you better results.
- Sign and forget – Too many times we see companies think that the sales will roll in by simply signing the agreement and visiting once a year. The most successful relationships are those where the manufacturer visits frequently, provide on-going training and visit clients with the distributor. We only recommend targeting new markets that you know you can properly support.
- Intellectual Property – Protect your most important asset before entering a new market through a distributor. Your trademarks are the first step. In Chile, we have seen distributors trademark names and logos of the manufacturers because there are no usage requirements like in Australia. When the relationship ends, the distributor has control of the trademarks. Protect yourself before entering into agreements.
Relationships between manufacturers and distributors are no different from any other relationship. They are born, they grow, they face pressures, and ultimately, they expire. A well-written agreement can be beneficial but ultimately the agreement cannot extend the life of a relationship once the relationship expires.
Doing some upfront homework will ensure you enter into an agreement with a partner that has the capabilities to meet your expectations. A well-written agreement will eliminate problems when or if things do not work out
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.