Note: This article originally appeared in Global Trade Magazine.
Myth: We don’t want to talk much about termination, because that spoils the momentum!
No one wants to think about how to end a relationship when it is only just beginning and full of promise. However, most agreements eventually end — in fact, most business partnerships only last an average of 5-7 years, and international ones even less.
So it’s worth spending time thinking about termination, especially while the relationship is on good terms.
That way you can avoid the problems that a medical device manufacturer encountered when it finally terminated its distributor in Brazil. The company found out that their new distributor would have to re-register all the products there — a process that would take nearly a year.
They tried to get the old distributor to help expedite this by asking them to share the files and work with the new distributor to smooth the transition. Because the relationship had already soured, the old distributor refused, and even stopped communicating.
To make matters worse, because the supplier refused to buy back any existing inventory, the former distributor just dumped it all on the local market at super-discounted prices, and said negative things about the manufacturer to local customers and government officials. And then they refused to pay most of their receivables.
The result: the manufacturer was effectively shut out of the Brazilian market for almost 2 years, and suffered very costly write-offs and sales declines. Their brand in Brazil was severely damaged.
If this company had thought more carefully about termination when they were setting up the relationship in the first place, they might have avoided some of these issues.
If this company had thought more carefully about termination when they were setting up the relationship in the first place, they might have avoided some of these issues.
You should always plan for termination, whether to a different distributor or to your own stand-alone sales office.
Here are some key points to consider when mapping out termination:
- Goodwill payments. Make sure you clearly understand any goodwill payments that may be due on termination. In some locations, these payments can be substantial. Puerto Rico, for example, has “Law 75,” that requires 5 years’ worth of lost profits as an exit payment, even if you terminate a distributor for poor performance.
- Inventory. Think through how the distributor’s existing inventory should be handled. It may be tempting to think, “They bought it, so let them find a way to get rid of it.” The problem is that they will drop the price, making it very difficult for your new distributor or your new sales team. Leaving the new distributor to pick up all the pieces usually doesn’t make for a smooth transition. Consider buying back some or all the inventory (other than maybe excess/no-move inventory) to essentially buy their goodwill so that your brand isn’t ruined.
- Product registrations and other key files. If you’re in a highly-regulated industry, think through how all the registration documents and files should be handed over. It’s generally a good idea for the supplier to register directly, if possible, and if it’s not, get copies of documentation as they are submitted. And if you can’t do either of these, it may be worth a generous payment to your old distributor, as this might significantly shorten your new partner’s time to market.
- Customers. Ultimately, protecting your brand is about making sure the end customers are happy or at least accommodated. Agreeing that your distributor will provide a list of customers and key contract terms will allow a much smoother termination.
- Accounts receivable. It’s surprising how many suppliers allow A/R to balloon, even when things are starting to go downhill with their distributors. Provide in your agreement for changing payment terms under different circumstances. Consider ways to manage your A/R, including credit insurance and alternative payment instruments, because international collection efforts are often difficult.
It might be tempting to torch and run from a market where things haven’t gone well, but you should probably think hard about entering a market if that’s your exit plan.
In today’s uber-connected global economy, the scorched-earth exit is seldom the best option, and can have unintended consequences and ripple effects.
Your old distributor’s inventory may appear in other markets, causing problems elsewhere. You may need to deal with bad online reviews, or a reputation (deserved or not) in your industry of being unfair or hard to deal with. Negotiations can become extremely awkward if you land a new client that wants you to take them to that market, or your company is acquired or wants an acquisition, and the other company has a significant business in that very country.
Detailed termination plans in the contract, along with building in a financial cushion to perhaps buy the old distributor’s cooperation, often just make good business sense.
Doris Nagel is managing partner of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Get a free excerpt from the book here.
Check out the previous articles in the series: #1, #2, #3, #4, #5, #6, #7, and #8.
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