Recently a friend told me that he had put his entire business at risk because he failed to foresee a major flaw in a partnership agreement.
At the end of 2019 my friend had just finalized an arrangement that was months in the making. He had considered asking his investors for another round of funding to expand sales for his surgical device company but decided that a distributor would better achieve his goals for fast growth.
Two large distributors were contending to carry his product and they each demanded exclusivity. He selected the one with an existing portfolio of medical products that was most complementary to his own.
For his fledgling business, the benefits of this partnership would be substantial. A distributor of this size would increase sales using an existing customer base, large sales team and worldwide reach to promote his surgical devices. He projected a five-fold unit sales increase in year one alone.
Shortly after the contract was executed, the distributor, true to the commitments made in the negotiations, promoted this new device with a comprehensive product launch campaign. To accommodate the expectation of increase unit sales, my friend doubled manufacturing. Everything was going exactly according to plan until COVID hit. The distributor furloughed several hundred employees and suspended all new sales activities. Their sales efforts, like most everything else in the world at that time, were in limbo.
Because he had given this distributor exclusive rights to sell his product, not only were other distributors precluded from selling his devices, but his own company could no longer directly sell his products either. Now his chosen distributor was incapable producing new customers AND incapable of fulfilling orders to my friend’s existing customers. Sales came to a halt and inventory piled up.
It required months of negotiation for this distribution partner to amend the contract and allow my friend's company to ship product to existing customers until the pandemic subsided. He was lucky that the distributor agreed to this even though they were not obligated to do so.
We hope that we never see another year like 2020, but it doesn’t take a pandemic to put your business at risk. While partnership agreements can be extremely beneficial, it is important to structure your agreements to address contingencies and protect your business from unforeseen consequences.
If you are considering a distribution partnership for your business and would like to be better prepared, click here to register for our partnership bootcamp.