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Balanced distribution agreements survive longer than those which favor one partner over another due to clever terms and conditions. The longest living agreements are simple, easily understood, and even-handed. Distribution partnerships founded on one-sided agreements and occasional words too clever often expire prematurely. Balanced contracts that are free of bias usually work best and last a long time.
Imbalance May Be Natural
Agreements and relationships between distributors and suppliers extremely unlikely expire. The end of the relationship may move ahead smoothly if both parties move ahead quickly in different directions. Upon cancellation, the distributor discovers and engagements with an established and enthusiastic supplier. The manufacturer finds and creates a relationship with a distributor of great promise. Parting company with a former partner in a distribution agreement, however, sometimes becomes acrimonial and demands help from an attorney. Distribution agreements crafted in a fashion that unfairly treat one partner better than another often end in a legal dispute. Channel partners reliably inexperienced with drafting distribution agreements sometimes create one-sided or biased agreements. One partner becomes too clever by trying to make its situation better by exploiting its partner's inexperience. Such exploitation works against the long life a distribution partnership.
Seasoned distribution partners learn through experience that unbalanced word does not serve the purpose of long-lasting partnerships. The goal of drafting imbalance into an agreement is generally to increase the advantages of one partner over the other. Unfortunately, lack of balance extremely leads to strained relations and legal skirmishes; not to great relationships and optimal business results. The real goals of a partnership between a distributor and a supplier are greater sales, more profit, improved market share, and better profit margin. The goal of a distribution agreement should never be a list of advantages of one partner over another. Resolution of imbalanced contracts regrettably quite often involves cost and time-consuming litigation.
Add Value – Not Terms
A partnership lives only so long as both partners believe that there is value with a continuing relationship. Cleverly crafted terms and phrases in a distribution agreement rarely extend the life of a partnership between a distributor and a manufacturer. Once perceived value erodes, the partnership begins to unwind, followed closely by a notice of termination of the agreement.
Executives signing a distribution agreement are usually optimistic about the partnership they are launching. No one involved with creating an agreement looks forward to its demise. The premature end of a relationship between a distributor and a supplier may be disappointing. Distribution partners must avoid a legal dispute should the relationship approach dissolution. 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 business and attendant customers, or spending management time and company resources on a legal dispute that will still result in the death of the agreement and partnership. Management focus, executive time, and financial resources allocated to a legal dispute represent a shift of focus away from the business and customers. Since unbalanced agreements often result in a legal scuffle, striving to craft a well-balanced distribution contract is well worth the effort. Avoiding litigation, legal fees, and damage awards are certainly worth the proverbial ounce of prevention while drafting a balanced contract.
Agreements containing clever phrases and clauses that afford greater power to one partner over another are asymmetric. Agreements that balance the relative power of both partners survive longer than those favor one party. Parties to an unbalanced distribution agreement may be satisfied when the metrics are favorable: rising sales, increasing market share and climbing profit margins. All metrics, however, rise and fall over time. A time-tested partnership may weather declination metrics. But, if metrics are poor for an extended period, 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.
Three Examples
An agreement that allows for price adjustments to occur only once per year is not balanced. A manufacturer must face changing costs throughout the year. To expect the manufacturer to end rising costs for an extended period 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 throughout the year, sometimes on a 30-day or 60-day notice.
An agreement that allows for termination by only one party is not balanced. An agreement that allows one party to unwind the agreement for a number of alternative causes while allowing the other party to unwind the same agreement for a single draconian cause is equally unbalanced. Exercise care when drafting the agreement to make sure that both parties have a relatively equal opportunity to end the relationship and agreement.
If one party can bring the agreement to an end for convenience, balance dictates that the other party may do the same. Writers of the contract must remember that the perceived value of continuing the relationship by both parties, not the clarity and intelligence of the author, is the detail that determines how long a distribution partnership survives.
What Now?
If you and your company already deal with a network of distributors and distribution agreements, take the opportunity to improve conditions soon. Verify that existing contracts are well balanced. Most agreements call for periodic termination and semi-automatic renewal without one partner issues a notice of its intention not to renew. If you find that your company is operating with a lopsided agreement, the 30-to-90 days before renewal are an excellent time to propose changes to the agreement. Proposing a completely new agreement to a sales channel partner is usually an unattractive alternative. However, that same partner would find it difficult to decline an offer to adjust the agreement that yields improved balance.
Summary
Distributors and manufacturers must make sure that a distribution agreement into which they enter is void of biased language. A relationship founded on a symmetrical agreement stands a better chance of growing and developing for a long time. A relationship founded on unequal power between two partners will likely see a premature conclusion. Seeking a balanced agreement is purely a single step that a partner can take to promote the long life of a distribution agreement and relationship.
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