As a BevAlc business expands, how does an entrepreneur determine if a distributor relationship will be beneficial?
That was the question poised during the Sovos ShipCompliant Beverage Alcohol Summit last week, hosted by the beverage alcohol compliance shipment software company. Legal professionals identified emerging wholesale agreement pitfalls particularly as the categories blur, including how suppliers can avoid costly exit fees, why understanding franchise laws could change the outcome of a contract, and where recent red flags pop up.
Three beverage alcohol attorneys weighed in: Shauna Barnes of Barnes Beverage Group, Elke Hofmann of Elke A Hofmann Law, and Arielle Albert of Danow, McMullan & Panoff.
The Not-So-Strictly Legal: Alignment and Reputation
Before getting to the fine print, all three lawyers cautioned that distributors and suppliers should discuss expectations.
“I get a lot of clients that come to me and they expect that their distributor is going to be their salesforce,” Barnes said.
But lawyers often counter by asking what plans the supplier has to support their new distributor. Are their selling styles aligned on an off-premise or on-premise focus? If the distributor is focused heavily off-premise, will the supplier have the capacity to sell into chains? Will the supplier bring a salesforce into the market?
“All of those things are things that I recommend my clients think about before they go in and start surveying a market and having conversations with distributors,” she said.
Doing some digging on reputation, including the reputation of the distributor’s salesforce in the industry, could also save suppliers trouble before they sign on the dotted line.
“Go to the retailers you want to be in and try to get a sense of which distributors they’ve had good luck with,” said Hofmann. “Even within the distributor there are variations in the salesforce.”
Switching Categories? Read Up On Franchise Laws
Over the last decade, disagreements between suppliers and distributors over terminating agreements in franchise states have made trade headlines, with some dubbing the intensive litigation from major brands as “the liquor wars.”
State franchise laws may look different from state to state, but most make it difficult and costly for a supplier to terminate a contract with a distributor. Those franchise laws can apply differently to categories, meaning suppliers ditching one distributor for another to gain a footprint with a new product should be aware of the possible consequences.
“New York has beer franchise laws and it’s not a franchise state for wine and spirits,” said Albert. “But if a spirits ready-to-drink supplier enters into a distribution agreement with a beer wholesaler and it has those terms, those provisions are going to be upheld and that’s going to make it extremely difficult to move wholesalers in the future.”
In general, agreements offered by beer wholesalers versus wine and spirit wholesalers look different: beer may be more franchise-prevalent, and wine and spirit agreements may include more marketing aspects. Barnes has also seen a shift in the last few years in which distributors are asking for more termination penalties, so suppliers should make sure that “the multiple isn’t so high that it ends up being a poison pill.”
Prepare to Negotiate
When suppliers, particularly smaller ones, are handed agreements it’s often implied that they are standard, but many areas are negotiable. One section of a typical contract is the right of first refusal, but suppliers should orient the terms around how they plan to grow.
“Be careful what your agreements are there because it may be right of first refusal for anything your brewery or winery ever makes, and what happens if you get acquired later or you acquire somebody?” said Barnes.
Making sure there’s a fair representation of each party’s responsibilities is also part of the conversation.
“How much do you want to do and how much do you want them to do?” said Albert.
The Red Flags
The biggest red flag is a “really supplier-friendly” contract, particularly provisions that allow for supplier termination at any time, according to Hofmann. Franchise laws could trump those terms.
“Just because you have this agreement but it doesn’t have a multiple on a buyout and you don’t have it pre-negotiated with what it might take you to get out— good luck later,” she said.