Heading offshore through distribution agreements

Imagine this. You're a new-tech business and you've got the latest hot new product. You made it through the really tough stuff, developed and refined your product and hit the New Zealand market with a vengeance. Now - how to tackle overseas markets?

Getting the product off the ground was tougher than you thought and you lost quite a few nights' sleep thinking you were about to go under.

You didn't have the dollars to market your product properly or get it ready for sale. However, you realised just in time that you couldn't do it all by yourself, set up a company, transferred your IP rights across and brought new investors on board. These investors provided just enough capital at the right time to keep you going.

You were well advised by your lawyers when you set up your company. As a result, you also set up a subsidiary to handle marketing and distribution. This helped insulate the value of your IP from the risks associated with marketing and distribution.

Along the way, you were very careful with your IP and made sure you kept the details as secret as possible (only letting people who had signed non-disclosure agreements have access to sensitive details).

You've come a long way, baby

All the hard work has paid off - you're now making in-roads into the New Zealand market. However, to make it really big you'll have to look offshore. Four million people just don't provide a market big enough to sustain the kind of growth you have experienced so far.

You know this is going to be difficult. If Telecom and The Warehouse struggle to get into Australia (with all their nouse and resources), how are you going to make it there or elsewhere?

You could try setting up and marketing direct to customers in a new country. However, this can be very costly and risky.

A popular alternative is appointing local distributors or, better still, finding a flagship customer who will distribute locally for you.

In this way you can leverage off their business and networks in the new markets. Sure, you might lose a share of the revenue, with your partner taking a cut, but isn't it better to have 50% of millions (or even 5%) than 100% of nothing?

Armed with a decent distribution agreement, you can conquer the world - or at least a percentage of it.

The right distribution agreement

Once you've lined up your distributors, you'll need a decent distribution agreement. Important points to consider in that agreement include:

• The term - How long do you want to appoint the distributor for? A shorter period may be sensible to start with - this way you are not tied in for too long if you're unhappy with the distributor's performance or you want to see how things work out before committing to a longer term arrangement.
  
  
• Price and payment - You can set an agreed price that you charge the distributor per product, but try and retain a degree of flexibility, letting you adjust the price to reflect changes in your underlying costs. An alternative is to have a revenue-based payment regime, where payments are based on a percentage of revenue earned by the distributor from your product. However, be careful not to set the price the distributor must charge customers and risk breaching competition regulations.
  
  
• Territory or market sector limits - Do you want to limit the distributor to a particular country or state or a particular market sector? Try to think about your long-term strategy before granting a distributor wide rights.
  
  
• Exclusivity - Should the distributor be the only one in the territory? Remember that a distributor with exclusive rights may put greater resources into training, maintenance and after-sales support than one whose profit margins are continuously under attack from competitors dealing in your product. If the exclusive distributor is a major market player, local competition regulations should also be checked. On the other hand, a non-exclusive distributorship means that you can go elsewhere if your distributor performs badly. The existence of competition between distributors could also prompt a better sales effort. One effective mechanism is to tie exclusivity to sales effort.
  
  
• Scope - Does the distribution agreement cover a single product, or do you want the distributor to distribute related products that you develop in the future?
  
  
• Audit/review - While trust is critical to the success of any business relationship, you should back that up by requiring the distributor to keep sales and customer data and allow you to audit that data if you wish.
  
  
• Marketing - Do you want the distributor to undertake specific marketing or advertising? Also, are you supplying marketing materials or is the distributor to prepare them and get your sign-off?
  
  
• Distributor's duties - Consider obtaining undertakings from the distributor on sales targets, training staff about your products, installation and support of your products, and reporting back regarding the use and distribution of your products.
  
  
• IP rights - Ensure you retain these and impose obligations of confidentiality on the distributor.
  
  
• Your duties - Consider what you need to do for the distributor: for example, endeavouring to fulfil the distributor's orders, providing demo versions of your product, training the distributor and providing reasonable technical and commercial assistance. Remember, your distributor will only be as good as the training and support you give them.
  
  
• Licensing - If your product is software, will you license the use of your product by end-users or grant the distributor rights to sub-license to end users?
  
  
• Support and warranties - If the product requires support, clarify who is responsible for the different levels of support and the costs of that support - distributors may take on first level support (i.e., help-desk), but you might have to provide more advanced support. Also, work out who should be liable for defects. You can't hide behind the distributor, but they can act as first port of call for complaints, servicing, etc. Consider limiting your liability though.
  
  
• Non-competition - Place reasonable restrictions on the distributor's rights to market competitors' products.
  
  
• Local laws and regulations - Ask the distributor to advise you what the local requirements are in this regard (for example, import restrictions or local equipment standards). Also, seek feedback regarding local preferences in relation to your product.
  
  
• Termination - Ensure that you can terminate in the event of the default or insolvency of the distributor. Think about what you need back from the distributor on termination too. Also, you might want a right to terminate if the distributor fails to meet agreed minimum sales targets.
  
  
• Governing law - Wherever possible, specify New Zealand law as the governing law of the agreement - this saves time and the cost of foreign legal reviews (foreign lawyers can be expensive).

Jeremy Salmond