If you work with international channel partners for long enough then at some point you will need to know how to fire a distributor. Why might you need to though and where do you draw the line with loyalty to your export partners?
It’s rarely an easy decision, but is sometimes a necessary evil. Before you take the decision though you’ve got to look at the full picture and decide whether the change is necessary or not, as it almost always involves a painful transition.
Why Fire Your Distributor?
There can be all kinds of reasons that you decide that the performance of your export partners no longer warrants working together with them. They mostly fall into 3 groups though:
- market conditions
- distributor performance
- personal issues or company strategy (nothing to do with the actual distribution partner)
Often in reality the reasons are a combination of several of the above, but let’s look at them in a bit more detail.
Market Conditions might force you to think how to terminate a distributor
These would be circumstances where changes on the market make it either impossible for you to continue doing business there, or where you need a completely different kind of partner in order to move forward.
This could include things like wars, sanctions, new laws that make it tough to import your products, currency devaluations or changes in local standards and licensing that you are unable to comply with.
Countries like the Ukraine, Russia, Iran, China or Lebanon are confronted with such issues right now. Egypt or Argentina have also had problems, especially with currencies.
Most of these points fall under force majeure clauses in contracts and are not the fault of either contractual party. That KIND of makes the decision about firing your distributor easier if you simply are not able to sell to him by law, but it’s a rubbish situation for both sides to be in, especially if you had a profitable relationship until now.
Still, usually in a forced pull out it’s more or less a mutual acceptance of a poor situation that neither of you can do anything about.
If you want to maintain the relationship intact, you need to carefully consider the timing of your decision. Running for the border at the first sign of trouble won’t endear you to anyone, but there does come a time where you have to decide whether business can be resumed within a reasonable time span.
Do you need to think how to replace a distributor for these reasons?
If you’re thinking about how to replace a distributor due to changes in market conditions this can get more tricky.
You might decide this is necessary for example due to changes in registration requirements that make it impossible for you to continue with your present partner. I’ve included this under market conditions, but it perhaps could be argued that in some way it’s a performance question.
If your present partner doesn’t have the right kind of company registration licences then a legal change might make a change of distributor necessary. Eg perhaps you’re effectively forced to move to either working with a state owned company or perhaps to forming a joint venture with a local organisation. (In such circumstances, you need to weigh up how much the market is worth to you, and whether it might be better to leave)
Firing your Distributor due to Poor Performance
This is probably the most frequent reason to change partners within a market.
The drivers here can be a lack of sales, a lack of focus on your brand, not complying with your guidelines in some major way or not paying the invoices on time (which could be linked to currency problems). Realistically not fulfilling any part of the contract could be a reason if it goes on for long enough and isn’t just a temporary issue.
There is usually a relatively long path to reach the point where you give notice on a relationship with a distributor due to them not meeting your expectations. It’s not a decision to be taken lightly if you have a contractual agreement. Of course, if it’s someone you made one delivery to but have decided that they’re not a good fit for you, then it’s a much easier question.
Poor Sales Performance & Non-compliance with Guidelines
This could be something that you can improve with coaching and the partner may well be grateful to receive concrete support from your side. After all, they usually also want to make a profit from your products – it’s in their interest to improve things. If they are not interested to cooperate in this improvement process, you may have to recognise that their company long term strategy doesn’t include your company as one of their key suppliers.
If support and coaching doesn’t bring them up to your standards then there comes a point where you have to make the decision to replace them. I have a copy of a really long checklist somewhere that I once sent to a partner of all the things in his business that I felt he needed to analyse with regard to his cooperation with the company I was working for.
Not paying on time
This is more difficult to remedy as it probably doesn’t purely depend on anything you are doing. Your partner may be overstretched due to a rapid expansion, they might be struggling with payments being delayed in the market, there could be currency issues in the country or he might simply be using you as a free credit line.
It’s something you need to discuss with your partner and decide on a case by case basis as to when it’s too much. If moving future orders to advance payment & installing payment plans doesn’t work then you may need to rethink the future of your collaboration.
Realistically speaking a partner who isn’t paying on time is usually having other issues with your collaboration, or with their entire business management.
Changes in your Company Strategy or Personal Conflicts
These are usually some of the most unpleasant reasons to terminate a partnership as the distributor often feels that they have been treated badly.
It could mean that you – or they – trod on the wrong toes, offending a powerful company owner, and the relationship just isn’t working or it could be that you’ve decided to open a daughter company.
Opening a daughter company is of course well within your rights as a brand owner, but it’s a really sensitive transition to make if you’ve been successful with a distributor until now, and the distributor is unlikely to give up a valuable contract without a fight and a lot of unpleasantness.
If it’s some kind of personal disagreement then for you as the sales person the only positive option might be for you to at least salvage your relationships within the distributing company (assuming you are not the one with the conflict).
If either company is being sold, or you suspect that the partner is about to go bankrupt, then this might also trigger an end of the collaboration. Or you might simply have decided not to work in that market any longer…One of my first experiences of firing a distributor was in Afghanistan in about 1997 & was for practical and political reasons.
Make a data based decision, even if the relationship plays a role in the timing
Of course it depends on the context …but it can be hard to know when to pull that release line.
It’s easy if you realise that your partner is involved in some kind of criminal proceedings or has been cheating you. The decision is clear: you need to end the cooperation and decide how to proceed in future with that market:
- Continue with a different distributor
- Pull out of the market altogether
- Change your business model eg. to direct to consumer online sales or start your own office in market with a sales organisation
If performance isn’t up to scratch because of a market situation (that could include payment delays due to currency controls), you’re more likely to give a partner you’ve worked with successfully for 10 years longer leeway, than the partner you signed up with last year. That goes in fact for performance scenarios too – you’ll probably have more patience with the guy who’s been successful for you for 20 years than with the person you signed up recently.
If you can see that despite coaching the distributor performance isn’t coming up to your standards anytime soon then you HAVE to find a way to change the partner
The personal one is tricky though. Realistically speaking, you can probably always find a way out of a contract BUT you have to consider what comes next…
Can the outgoing partner ruin your reputation on the market (maybe you don’t care if the market is small or so difficult that you just want to pull out)?
Do you have a really strong alternative lined up?
You need to calculate the cost of your options, including the factors I mentioned above regarding returns from the market etc. This will influence also the timing for any change you decide to make – you might decide to wait another year in order to find the right alternative.
It varies according to your product and regulatory situation, but changing a distribution partner costs usually 6-12 months in consumer products so you need to factor that into your calculations.
Add on top of that the risk in some markets that you might not be able to import at all until any legal battle has been resolved (& if you’re sued in country, the court is more likely to support the distributor)
How to fire a Distributor in 8 Steps
These are points for you to consider – not any form of legal advice. Even if you don’t have a written agreement in place (and you SHOULD) then the fact that you have been working with a company for some time, implies a working relationship that can lead to certain legal obligations.
Remember that emotions are running high in this kind of a situation so it’s important to keep calm and not forget that it’s people and their livelihoods that are impacted.
Does the written agreement provide suitable terms to support your decision to terminate the agreement?
Do you according to your contract have grounds to give notice on the agreement? It should be clearly defined under which circumstances you can end a contract early & with which period of notice.
It also should be clear when you can simply “not renew” a contract without needing further reasons… (You do need to inform the partner in writing though of that fact!)
Collect Objective and Quantifiable Data to Support your Decision
If you’re thinking about how to fire a distributor you need to gather the proof that the decision is justified. Sales data, emails etc – whatever will back up your decision. Depending on the advice from the lawyers – see below – then you might need to give some kind of formal written warnings about the need to improve performance in order to be on the safe side.
Realistically though, if you don’t want to keep working with a partner you will always be able to find a way to terminate the contract – it just might take a little longer than you’d like, and during that time you’re potentially losing ground on the market. That shouldn’t sound like a distributor has no security regardless of their contract, but if the partnership isn’t working out for either side, you will find a way to terminate.
Check with 2 Lawyers
Get the contract and your grounds for termination checked by both a lawyer in the jurisdiction of the contract (hopefully your home market or close by) as well as a lawyer in the country in question. This is what you need to do before you take any other steps.
They will be able to advise you on the steps you need to take and the documentation you need to prepare to be ready for the worst case scenario of the partner taking you to court. Some countries (Lebanon I’m looking at you ????) allow distributors for certain products to register contracts regardless of the agreed jurisdiction so that even if you terminate a contract 100% correctly, you may be forced to compensate the distributor for his work in building your brand. You might even find it de facto impossible to change partners without getting containers blocked in port by court orders and the like.
There are also cases where you may have to pay compensation for the work to build up your brand in Europe if you fall under the regulations regarding commercial agents (be REALLY careful with this point as it’s not always obvious)- get the advice months in advance and then you will be prepared.
Once you’ve finalised the decision, make sure your notice of termination is as per the contract
As the title says, make sure you adhere to the contract agreement to the letter especially regarding timing & method of delivery.
Don’t just suddenly reduce all of you communication to the contractually agreed written form though if possible. Keep talking with your partner as far as possible.
How will the handover to a new partner be managed?
This point for me is one of the main (practical) reasons why you need to have a watertight contract. Which steps do you have regulated in there about the end of a cooperation?
If you’re lucky with a partner who isn’t able to improve their performance to the level you need (or perhaps the market has changed in ways that means your brand is no longer an ideal fit for the rest of their business) you may be able to persuade them to resign the distributorship. In that scenario you can both tell the market that it’s a mutual decision and simply move on, after agreeing how to hand over any open projects or business. I’ve seen this more with investment type products rather than consumer goods, although I did have it once when a pharmaceutical distributor didn’t want to sell my products into general food retail.
There’s often a lot of bitterness in the discussions by the time you reach this point which is why the contractual regulations that you agreed in the calm and positive atmosphere at the start of your collaboration are so important.
Now is the time to give thanks for that long contract negotiation and to discuss as pragmatically as possible the details of what needs to be done.
- What will happen with product registrations (are they in your name, or the importer’s?)
- How about import licences – some countries only allow one company to be listed as the official importer so you don’t want to be blocked here
- What will happen with any stock the distributor has in his warehouse?
- Which prices will you buy the stock at (agree this calculation scheme if possible in the contract!)?
- What happens with retail listings?
- If you’re talking about products with an expiry date, you probably need to prepare the new partner to accept certain levels of returns and to agree with her how you will compensate those in order to avoid too much disturbance on the market
- What will happen with other financial investments that your almost-ex has made in retail listings, marketing etc.
You need to think about these points in advance, before you announce to the distributor that you will be ending the partnership for poor performance. The costs incurred here need to flow into your calculation of whether it’s worth changing to a new partner – or how long until you have a positive return in the market?
What is your Plan for Challenges to the handover?
You need to have a plan in place for how you will manage difficulties that come up between yourselves and your almost ex-distributor. They might refuse to conform to the conditions that are basically agreed or just take as long as possible to comply, causing you difficulties.
A distributor who is deeply hurt that you are ending your partnership can lash out emotionally on the market, causing you problems for months to come, so it pays to be prepared. I’ve seen companies flood the market with the stock they had at rock bottom prices, inform retail or even verbally (never in writing) inform consumers that you are about to leave the market entirely and of course the easiest one, simply leave the market empty for months on end. This last one is an especial risk where you have a longer notice period of say 6 months.
If you give notice at the end of June and the distributor simply stops taking any more orders (instead of ordering monthly) that can leave the market empty and you with a problem in your home warehouse if you didn’t make adequate plans with your production for that happening.
Other problems that can come up (beside the “old” distributor refusing to hand over stock, rights, registration certificates or anything else pertinent to the sales of your brand) are mostly of the “bad mouthing” variety.
If your new partner has a better reputation than the previous one, then this is less likely to be a problem, but disgruntled partners often explain to retailers and anyone else who might listen, how bad you are as a partner and any “secrets” they might know about your brand and way of working.
Be ready to be taken to court
Whether you have arbitration or court agreed in the contract, you always have to be prepared for a distributor to decide to take you to court if they feel unfairly treated.
That’s why I put so much emphasis on you getting the advice of lawyers (it’s cheaper to have a couple of hours of consultation than it is to need support through a court case) and keeping communication open with your partners. Really documenting your reasons for ending the collaboration is a key part of this.
Ensure that new partner is working smoothly
Personally, I would recommend that you have a replacement partner in the starting blocks before you even formally give notice on your existing one. This varies a bit according to the notice period that is agreed in the contract – often this is only 3 months so it’s really worth having the next partner lined up. Otherwise this could become a really stressful situation.
Once you’ve made the change, make sure you give the new partner as much support as possible. Realistically speaking a change of partner will often cost you around 12 months of market development so you need to do as much as you can to keep that time to a minimum.
Product returns, renegotiating poor retail conditions, rebuilding your reputation on the market all of these are long processes and require a diplomatic approach both from yourselves and your new partner.
How to fire a Distributor isn’t a “One Size fits all Situations” Solution
You’ve got to weigh up all the options before you decide & it can be a pretty complex decision – sometimes it’s a relief to fire a distributor, but mostly just a massive pain in the proverbial even if the future is better.
It comes down to whether you’ll be better off working with a different partner, or whether the cost of being with that partner simply isn’t justified by the returns. The decision is often hardest when the relationship is good but the performance isn’t – the temptation is always to hang on too long in that case.
One final thought: in most markets and industries it’s almost impossible to carry out a silent search for a new partner so you need to be prepared for the fact that your existing distributor will probably find out you’re looking around. You can probably do some initial fact finding and discussions without raising any red flags, but especially in smaller markets (eg within Europe) the news will probably get around before you officially announce anything.
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