Whales I: Distribution Agreements - Deal Safari
In our teams’ experience working with companies of various industries, sizes, structures and stage, we’ve watched countless deals close and countless deals dissolve.
There’s no “secret sauce” to closing a deal, sales are motivated by each party’s preference and willingness to be flexible on specific terms. If the parties aren’t flexible enough, odds are that the deal won’t close.
From a distance, closing deals is nothing more complex than two people filling out checklists of wants and needs, negotiating tirelessly to get as many boxes checked as possible. But when looked at closely, there are many more factors in play when closing a deal, like motivation, deal size, deal effort, among others.
In our time working with so many companies, we’ve come to label deals as animal types.
In this segment of Deal Safari we’ll be looking at the ‘Whale’ deal type.
The typical Whale account is one in which a party is working with or negotiating with a potential customer or partner that is a large corporation. Whale accounts can also be deals in which the close of the deal could be monumental for the client in terms of its value across a number of factors. Put simply, it’s a big deal with a lot of risks associated.
Whale accounts can involve parties such as major financial institutions, major technology companies like Google or Microsoft, or even major government bodies. When dealing with Whale accounts, there are plenty of common issues found but the one that always proves most difficult, in our experience, is time.
Realistically, because of the sheer size of the deal, there are so many moving parts that issues are bound to arise. These issues all end up leading to the larger issue of delay and extension of both teams’ sales cycles. When sales cycles extend, money comes in slower and fiscal year-end numbers drop.
The real problem to solve when working with Whales is how to shorten those deal cycles and how to get both parties to the “negotiation table” for an efficient close.
Our team believes that the most important aspect to closing Whale deals is retaining deal history and retaining a heatmap of decisions. If the real problem to solve is speeding up Whale closes, then being able to reflect on past deal knowledge and decisions is incredibly beneficial to any future Whale deal drafters. If given organized access to deal precedent, slow-closing Whales can turn into much cleaner, efficient and less costly deals.
Our team is constantly building new solutions to help safely expedite deal closings, catered to whatever deal type we encounter.
In Distribution Agreements…
A Distribution Agreement is an agreement between a supplier of goods and distributor of goods where the distributor sells the supplier’s product.
This document can be used when a supplier wishes to use a distributor to distribute product throughout a defined territory. Distribution Agreements can be exclusive or nonexclusive, depending on whether the distributor will be given the exclusive right to distribute the product(s) in the territory. This document includes the obligations of the supplier and distributor, as well as a compensation scheme and who bears liability for shipping insuring and delivering the product. The agreement can also deal with the product’s marketing.
Here are a few key deal points to look out for when dealing with Whale Deal Distribution Agreements:
This term defines the geographic region that the agreement is effective within and the period for which exclusivity is granted. In a Distribution Agreement, this is typically the territory that the Distributor is responsible for. Being able to determine where certain distributors may operate can allow the Supplier to manage the Distributor in certain territories.
In Whale deals, exclusivity is always heavily dependent on the nature of the product. If the product is unique, expensive and generally in high demand, many Whale deals will involve negotiations over exclusivity and the distribution territory. If a supplier is trying to bring a product to a territory that has no current access to said type of product, the stakes are set high for both supplier and distributor as they both have much to lose. If the deal falls through, a new supplier could enter the market and secure the distributor - this also goes for the distributor who could lose out on sustainable, high-growth sales if the supplier chooses to work with a different distributor with better terms.
The Agreement Term clause is, while standard across business law contracts, especially important when it comes to Distribution Agreements. The nature of the Distribution Agreement is based on one party entrusting the other with selling the product, and one party entrusting the other with making sure it’s a good product. If one party doesn’t hold up their end, neither party profits.
When looking at this term through a Whale lens, the term of the agreement holds a lot more weight. Whale deals typically include a much larger initial financial investment, which in turn translates to a lot of associated risks. Along with financial investment, Whale deals often require much more labour, thinking, and planning time to execute, adding onto the initial investment. All this being said, the length of the agreement is important for Whale deals because if done properly, then all the hard work pays off and both parties profit for the entire length of the agreement and potentially longer upon renewal. If done poorly, both parties may end up looking at a lengthy agreement term with no profits in sight and a wasted initial investment.
Support and Supporting Materials
Support is a standard term negotiated in Distribution Agreements, especially when it comes to Whale deals. Support can come in a variety of different mediums but the ones our team focuses on most intently in practice is customer support and marketing materials.
Since distributors aren’t the ones creating the product, it’s quite rare to see them doing marketing or customer support for the products - this is typically handled by the distributors. However, it’s not always this simple and in our team’s experience with Whale deals, support will often become a heavily negotiated term.
For one, we’ve found that due to any number of reasons, distributors will sometimes want to offload the marketing and support duties on to the suppliers. This could be based on the amount of work already gone into the deal, the lack of labour or marketing expertise on the supplier’s side, or even that the distributor specializes in being able to handle those types of duties. Regardless, this does happen and it’s something to reflect on, considering how large and long of a deal this may be.
Another interesting example we’ve heard recently is how suppliers will sometimes train the distributors’ staff to handle customer support. This seems like it would be a lot more prominent in Whale deals and is something to consider when negotiating support terms.
*About Us: Clausehound, a legal tech company that firmly believes that lawyers are taking far too long to review customer agreements, to the point that revenue targets are missed and that deals are falling apart. Clausehound is accelerating the deal closing speed for companies by 90 percent, delighting sales teams by unblocking the lengthy legal review process on partner/collaboration deals, MSAs or license agreements. [Click here to learn more!*](https://calendly.com/maxmessenger/live-demo-clausehound?month=2019-12)**