Distribution Agreements: Best Practices
“Thoroughly read all your contracts. I really mean thoroughly.” -Bret Michaels
It used to be that beer distributors could dictate the terms of the supplier contract. Those days are long gone.
Ten years ago, breweries would ask for your standard distribution agreement, they’d sign it without a question and you were in business.Today, the brewery sends their standard agreement, along with a wholesaler information sheet, requests for blood samples and DNA testing.
The world of distribution agreements has changed dramatically, and beer wholesalers need to change as well.
In this article, we’ll cover distribution contract best practices, review contract do’s and don’ts and cover the one thing you must have in your agreement. Your distribution brand rights represent the value of your company. Use these best practices so that your value is protected.
Contract Best Practices
- Contract basics: Know the terms, but don’t get lost in them
- Use a Standard Contract
- The One Thing in the Contract you must get right: The lovely termination clause
- Contract management: Implement this Process
Standard disclaimer: I’m not a lawyer, and I don’t play one in your email inbox. Nothing here should be considered legal advice, but only ideas that may be helpful to improve your distribution agreements.
Contract Basics
The purpose of the distribution agreement is to define the terms of the business relationship between brewery and distributor. The contract outlines the territory, brands, marketing spend, and expectations for both parties.
As with many business contracts, no one actually reads them until there is a problem. A good contract should, therefore, clearly define what happens when a dispute arises.
Below are the typical sections and contract terms that are included in the distribution agreement:
- Appointment. “I take thee to be my wedded wife…” The supplier appoints the distributor to sell certain products in specific territories.
- Terms of Sale. Product prices, payment terms, samples and point-of-sale details are outlined here.
- Obligations of distributor.The responsibilities and expectations of the distributor are listed in this section. Maintain necessary licenses, on-hand inventory and use ‘commercially reasonable’ efforts to sell to licensed retailers.
- Obligations of supplier / brewery. The responsibilities and expectations of the brewery. Maintain necessary licenses, provide adequate amount of product, provide point of sale material, etc.
- Mutual obligations. Formally, this means an annual meeting to outline goals and objectives. Informally, it means: talk to each other. Act like business people and communicate needs and expectations on a regular basis.
- Termination. Spell out the conditions that would lead to a termination and outline what happens next.
- Trademarksand Intellectual property. Distributor acknowledges the brand names are the brewery’s property, and brewery allows distributor to use them.
- Hold harmless and indemnification. The brewery promises the beer is fit for consumption, and holds the distributor harmless from claims related to brewery operations. The distributor promises to hold the brewery harmless from claims related to distribution operations.
- General Conditions. This section spells out the governing law and which state has jurisdiction.
- Signatures. Sign on the dotted line to make it official.
- Exhibits and attachments. This attachment to the contract lists out the specific brand names, products and territory where the distributor can sell.
Today, everyone has a lawyer. Distribution agreements have become a game of ‘one-ups-manship’ to see who has the smarter legal team or best the new trick to give one side or the other an advantage.
Best practice #1 is to remember the primary goal of the distributor agreement: to clearly define the roles, responsibilities and expectations for the business relationship.
Use a Standard Contract
The best practice when it comes to contracts is to write your own.
Simply put, if you don’t have your own standard distribution agreement, get one. Have your lawyer write the agreement, review it together, understand the sections that are important and unimportant.
This is the agreement that you will present to new or prospective suppliers. Most craft beer suppliers will have their own contract that they ‘require’ you to sign, but for the other, less lawyered-up breweries, having your own contract saves time and ensures you will have the contract language you want.
There’s no need to make the contract overly one-sided with onerous or penalizing terms to the supplier. Make it a fair contract that gives you protections and ensures your equity in the brand and ability to sell or transfer in the future is intact.
This is a business relationship. Think bigger. Think forward. Most contracts are written by small minds. Don’t be a small mind.
Termination Clause: The One Thing You Must Get Right
In my humble opinion, the termination clause is the most important thing to get right in the agreement.
The value of a beer distributor is in the brand rights. If the language in the distribution agreement limits those rights, the value of your beer business may be limited as well.
The best practice is to spend time with your attorney and make sure the termination section of the agreement is done correctly.
Contract Management: Implement this Process
New breweries and brands are added on a weekly basis these days. How do you keep up with reading the contracts and ensuring you’re signing an agreement that is fair?
One idea is to use a tracking sheet to quickly summarize the key points from all your contracts. At a minimum, the tracker should show the brewery name, whether you have a contract, and if it is signed.
Document management systems are a great way to safeguard and organize your contracts. We use DocRecord by Prism software. These systems make it easy to access contracts, and find what you need when you need it.
The best practice: Organize, safeguard and summarize your contracts. After all, these are your most valuable assets.
Wrap Up + Action Items
Distribution agreement best practices include these steps:
- Get a working knowledge of contract terms – see the summary above
- Write your own contract – have a standard agreement ready to go
- Spend time with an attorney and get the termination clause right
- Use a tracker and document management system to organize and safeguard your most valuable assets: the distribution agreements
Talk to the professionals. In a game of one-ups-manship, it’s good to have a smart lawyer on your side.
Your brand rights are your business. Bad language in a contract can restrict your rights and impair your value. Invest in good advice, stand up for a good contract, and protect the value of your distribution business.
