Practical Tips for Distribution Partnerships in Latin America
Many companies will choose to sell their product through a distributor when looking at international markets. The idea is that companies can use the already established relationships of their distributor to sell their products. The benefit is that companies can enter new markets without having to invest in their own sales teams or local office. The downside is that you lose control of the sales process and the success of the partnership really depends on the distributor being able to sell.
When it comes to a distributor agreement, there are many aspects that determine whether the relationship will be successful. In most cases though, any mistakes that are made during the initial process are often not seen until the end of a distribution partnership. 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
Companies are often very excited when they meet a potential new distributor that they believe fits well with their product. The manufacturer is excited because they have a potential new product that they believe is interesting for the market. The result is that often companies are giving too much, too fast.
The typical process for finding a new distributor is that companies fly into the region, meet a few potential distributors, and leave a few days later with a verbal agreement that covers multiple markets. The issue is that in Latin America you often need multiple distributors to really have a good handle on each market. There are very few companies that have the proper reach into multiple markets. Generally, distributors are strong in one market but weaker in others.
Ax Legal Tip – It is important to remember that mine sites in countries like Peru and Chile are spread out geographically. For distributors to be successful, they often need to be on site frequently which means it is better to have multiple distributors to cover an area properly. It is our opinion that it is better to assign a territory that is not too large initially. We recommend starting with the distributor’s proven territory and then expanding it as they prove themselves.
Exclusive or Non-Exclusive
It very common for distributors to request an exclusive territory. Their argument is that sharing a territory means they have no incentive to invest resources towards developing sales. When a supplier assigns exclusivity, they are putting a lot of trust in a distributor that has not proven themselves yet. If the distributor does not prove themselves then the company loses one year or more waiting to see what happens with sales.
Ax Legal Tip – One alternative is to draft the distribution agreement in such a way that the distributor is non-exclusive but providing them exclusivity over smaller, more manageable territories or even specific mines. You can have multiple distributors and then choose the one that works best. Equally important is to place realistic goals and targets on the distributor which gives the supplier a way to exit the agreement if the goals are not met.
Ax Legal Practical Tips
- Do your due diligence – Foreigners tend to be very trusting, even more so when we are in a foreign country, and the person they are dealing with speaks English. Speak with end clients, speak with other companies they represent, speak with former employees, etc. Due diligence of distributors is important step that takes time but will save you heartache to really understand if the person you are dealing with is being upfront about their capabilities.
- Small or large distributors – Large distributors will often represent many products which means there is the less time they can focus on any one given product. Smaller companies with good relationships at a site level will often get you better results. Choose distributors that will commit the resources needed and not on the size.
- Sign and forget – Companies think that by signing on a distributor and visiting once a year that the sales will simply roll in. You will be disappointed. The most successful relationships are those where the manufacturer visits frequently, provides on-going training, and visits clients with the distributor. We only recommend targeting new markets that you know you can properly support. This also means being quick to provide information that the distributor requests. Deals die when the manufacture is slow to provide information.
- Intellectual Property – Protect your trademarks before entering a new market through a distributor. In Chile, we have seen distributors trademark names and logos of the manufacturers they represent because there are no usage requirements like in Canada. When the relationship ends, the distributor has control of the trademarks. Your first should always be trademarks when entering a new market.
Companies will have different needs when it comes to finding distributors. It is our experience that companies with more complex products or technologies get more from the relationship when they have staff in the region that can work with the distributor. Quite simply, distributors have their limits so many can open doors but they need to be pushed and supported. Having someone in-country who can work in the language of the country you are operating in is one of the biggest differentiators for companies who know how to supercharge their sales efforts.
Companies will benefit from doing some upfront work before entering into an agreement with a potential partner. Do not rush the relationship and ensure there is a well-written agreement. Some relationships will work, and others will not so ensure you are covered for the latter.
Ax Legal is a legal and business advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects are clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.
To better understand how we can support you in the Region, please contact Cody Mcfarlane at email@example.com