January 2005

Last month we spoke about evaluation. What happens when things aren’t working out between your company, you and your business partner? Do you just give up, frustrated, and terminate them?

It is easier to fire than it is to hire.

Normally, a distributor is "fired" because he simply has not performed.

If you haven’t done your homework and are not prepared, there can be serious consequences!

If you play the cowboy (shoot first, think later) – with no alternatives, no back-up plan, no preparation, no documented justification, you may find yourself in court in a multi-million dollar lawsuit. It will cost you money in litigation, lost time, lost opportunities and lost sales (and you will probably lose). Plus, you may be blocked out of the territory, prevented from selling. There may be additional negative spin-offs of instability and unhappiness with demotivated business partners and uncertainty among your customers, causing additional losses sooner or later.

Let’s look at some real cases of what is happening:

Scenario 1
It’s nasty, but they are gone for good. You recruit an excellent new partner. Not only is this partner great, they have either 1) people on their staff that really know you and your products; 2) have just hired some one who really knows you and your products or 3) just acquired a small business or recruited a new dealer who really knows you and your products. And guess what? These are those guys you just got rid of! Now what?

Scenario 2
There is no alternative or replacement. Who will take care of the existing customers and the market? Your brand image?

Scenario 3
The customers and dealers are faithful to your terminated partner so they leave too.

Scenario 4
Your terminated partner owns all your brands and trademarks because these trademarks and brands were registered in their name, not yours. Now you may buy them back, create new brands or just not sell in the territory.

Scenario 5
The courts have decided to freeze your business activity in the country during the litigation (1-3 years).

Scenario 6
All your other distributors start jumping ship – that’s right, leaving, finding alternative suppliers.

Scenario 7
The distributor failed to perform because you failed to perform. The court discovers that your company is at fault because your demands were unreasonable for the market, your products or advertising unsuitable, or your performance prevented the partner from performing. Who do you think will be at fault and who will be protected? Thus unfair termination and for how much? Our worst case example was a payout of $20 million, in cash, plus taking back all the old products and components, including paying for the dedicated facilities that had been constructed to handle the business and client indemnities.

Scenario 8
You terminated them but in the contract, you don’t have a basis or you can’t. Even worse, you don’t have a copy of the agreement made some years before your arrival, and they do. This could be construed as a breach of contract.

Scenario 9
Local law takes precedence and annuls your termination, and finds against you. If no agreement or even with agreement, are you able to terminate under the existing local laws of the territory? It is not uncommon that local laws take precedence over your agreement, no matter what your agreement states and even if both parties have signed it. The results are similar to Scenario 7.

Scenario 10
You win in court – but it’s your court in your country and they are in another distant country. How (if even possible) will you enforce the judgment? Usually with great difficulty if at all. It is best to get them where they live, assuming you have a legitimate reason (see Scenario 8 and 9).

Scenario 11
You are big, they are small. Courts favor the underdog, and the home team. You are neither.

Scenario 12
The distributor owes you a lot of money. Get it first, before you terminate! Once he even smells that you are going to terminate, you can be sure that payment will be slow in coming – if at all. And it is extremely unlikely that you will get it afterwards.

Scenario 13
You forgot to inform everyone in your company. Your terminated partner keeps ordering and your company keeps shipping. (Are they going to pay?) Stop all shipments immediately! Notify everyone in your organization that this business partner has been terminated and your company will no longer conduct business with him.

Finally, what do you do after any of these scenarios?

Yes, there are other approaches.

In today’s business environment, there are many alternatives and constructive ways to change your relationship without “killing off” your business partner.

In the best order:

• Improve yourself, your people, your own operations
• Improve the business partner, their people, their operations
• Limit the business partner (de-certify), less territory, less product, more focus
• Change the business partner
• Change the channel
• Go direct
• Do nothing, let it die a natural death
• Get out

Ideally, preparation and evaluation started way back in the beginning with ideal contracts, roles and responsibilities, annual evaluations, etc. But for most of us, we inherited our job and our business partners and must act on what we have.

Where to start.

First, don’t do anything but homework. Evaluate scientifically and deliberately: from a determined checklist, (on a regular basis if you can). Get help both internally and from external experts. Find out what is really going on, what are the issues, why is termination being considered, what is the basis for such a decision. Is it a sound business basis? (Or is it a personality clash?)

Start fresh.

Your company, your predecessor selected this business partner with some good reasons. The business partner signed on for good reasons. There probably was success and cooperation in the beginning. What has occurred to slow down or sour that success? Make a list. Seek to understand.

When conducting your initial evaluation, audit, and fact-finding, you must look equally at your own organization – has your business partner failed to achieve his objectives because you have failed or prevented him from doing so in any way? The list is long, some typical items: your company has imposed unreasonable sales quotas for the territory, even if he accepts them; your company has prevented him from performing through inadequacies in your policies, procedures, processes, or products, delivery, faulty or unsuitable product, inadequate or wrong advertising and promotion, lack of training, lack of technical support, etc. etc.

Identify the weaknesses – and what you will do or recommend to minimize or to eliminate these weaknesses. How can your partner help you?

What process have you established for your partner to evaluate you, to alert you? What recourse do they have?

We strongly recommend working with your business partner to change the situation through a variety of corrective actions. This may take some time, several meetings and some creativity. You may need a mediator or facilitator (which is being done more and more often), a role that we have played for some of our clients. However, it is always more than worth it.

What are the benefits of constructive change?

It’s cheaper, faster and easier than finding and implementing an alternative. Your business partner is a known entity, already familiar to you, your company, your way of doing business, your products and vice versa. They have a vested interest in you for the same reasons.

By protecting the relationship, you increase credibility, trust and loyalty in the market place with your other business partners and customers.

What are the costs and consequences of making a change or terminating vs. the costs and consequences of not changing or terminating?! For example:

• To what extent do your end-user customers buy on the basis of the type of retail outlet or business partner vs. your brand?
• Would they seek out your brand in those channels and partners that are to be emphasized?
• What are the future market trends regarding the importance of these channels and partners?
• Have current marketing efforts and policies directed at the channels and partners been optimized?
• What will be the effect on the existing channels and other partners?

Ok, so you still want to terminate.

Decision Taken?!

If the decision is taken to "fire" the business partner and any problems have been anticipated and catered for, then:

1. Line up, as discreetly as possible, an alternative distributor before making the break. Move quickly and cleanly.
   
   
2. Practice good human relations, try and let your business partner to be terminated save face. Allow him, help him to withdraw gracefully. Make it easy and prove your case through rational data indicating why it doesn’t make good business sense to continue – for either of you. It’s not personal. It’s just not good for business at this time.
   
   
3. Try and effect an amicable "parting of the ways". You may need this business partner in the future for other products and services and you many encounter them again elsewhere. They too have a reputation, connections and a network. Better to have friends.
   
   
4. Transfer the stock held by the "old" business partner to the "new" business partner. This can include transfer of personnel, customers, and even training the new partner’s people. You may allow for a percentage of the new business to go to the old partner as compensation for leads and cooperation.
   
   
5. Terminate at the end of the agreement. Otherwise, you may still be in violation through breach of the contract.

Because you have selected the best partners you can, and they have selected you, it is in everyone’s best interest to make the partnership work and achieve its objectives. As in any partnership, this requires constant work. The partnership may get derailed but that should not prove disastrous. Get them back on track.

If you need help in assessing your next steps to change or terminate, through an audit, evaluation of your potential liabilities or with mediation and change , email MNSA with your requirements. We have helped before.

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