Thread: Distribution Contracts? Whats Typical?

Hey Guys hows it going?

My Father has a chemical distribution business and we are working on a new business deal in the automotive/diesel truck retail segment. This is definitely out of our normal range, as we tend to deal in the wholesale side selling to manufacturers. But we have leveraged our connections and vast network to take a ready to sell lubricant product to the truck stop market.

We are currently establishing contracts with the vendor group who manufacturers the lubricant and I have a few questions. First off the vendor is currently a very small start-up business that we have been talking with for about a year. Once we sign this deal with them we will become their distributor for the truck stop genre solely, using our connections to the sell to the likes of Loves, Pilot, etc.

I am looking at proposing a 5 year deal with them for all distribution to this market to help lock us in for at least 5 years. My concern is once we hit this 5 year mark their business will have gone from relatively small to huge, and they might feel at that time they don't need a regional distributor but instead a larger national distributor. So I am looking at ways to keep from losing out on this business beyond the 5 year mark. Is 5 years a good starting contractual term or should I go for something longer like 10 years? My other thought is to write up somewhere in the contract an option for shares in their business or some way of becoming a partner in the business at some point?

I'm looking for suggestions on insuring that my initial value isn't lost once they grow and become of substantial size? I would like to be involved in the business for many years into the future, based upon my hard work and leveraging of contacts if that makes sense.

Let me know your thoughts on this guys or if I haven't been clear enough please say so and I will try to elaborate the best I can. Please keep in mind I'm not very familiar with deals of this nature however I am exerting a lot of effort towards this deal because long term it could provide the growth necessary to gain market share in other areas of business based on capital and cash flow provided by this particular deal.

Thanks,

John

does that shop also run the risk of going out of business?

seems like if you keep them happy..... they will keep you around. as long as you can meet their demands.

The manufacturer we are working with does have the potential to go out of business. However if we do our job via out network then that will be virtually impossible due to consistent business. I understand that if we do our job we should be good however we still will be a regional distributor attempting to work on a national level. I know we can swing it but I'm just trying to prevent anyone from forgetting the early days and who got them there.

So does 5 years sound like a good term, is that typical for a distribution contract or is it shorter or longer.

Thanks,

John

Alright guys well just to follow up and let everyone know what we ended up moving forward with here it goes.

I spoke with my contract lawyer yesterday and we agreed to a set of terms that would benefits us. What we have decided to do is outline the contract for 5 years, with a clause that states at 3 years we can propose to extend the contract 5 years from that point. We did this because I feel it will take 3 years to see if this deal is really going to kick or not, if in 3 years I get the feeling were on the right track we will push for re-upping for a longer period prior to the big kick. If its not going in the right direction then we will just let it run out the original 5 years and fizzle out.

Well not sure if anyone cares but there it is, thanks for every ones support.

John

I think that the 3 + 2 makes the most sense. My experience with long term contracts is not distributing, but in aerospace. Long-term deals with NASA and the military are structured similarly. A ten year deal would be 5 years up front + 5 one year extensions.

I hope for the best for you and your father in this venture.

Thanks David, I'll keep you guys posted a long the way.