FEBRUARY 17, 2004

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SMART ANSWERS
By Karen E. Klein


Before Putting Up the Cash...
As with any commercial agreement, an international distributor needs to know what he is buying prior to cutting any checks -- especially large ones

Q: I run a small business and have agreements to distribute a number of products from the U.S. I came across a new and completely unproven product, but for the first time, the principal is asking for advance payment of $100,000 for the master distributorship, or a lesser amount for the distributorship rights for a small territory. Is this a common practice, one that I have simply had the good luck never to have seen before? Can you point me to any resources about negotiating, writing protective clauses into, or otherwise dealing with, an agreement like this? -- R.A., Hong Kong


A: Apparently you have indeed been lucky in not having to deal with this type of modified "slotting fee" up until now. Our international business experts say that such fee demands are fairly common for international distributors. "It may not be too unusual for a supplier to request an advance payment from the distributor, so as to ensure that the distributor can achieve a minimum sales target for the coming year," says Priscilla Choy, with the Hong Kong law firm of F. Zimmern & Co. "However, if the supplier is unknown, and the product is a completely unproven product, you may have to reconsider whether to agree to such proposal."

SAMPLE DOCUMENTS.  As to negotiating such an agreement, there aren't any hard and fast rules. "It is a commercial negotiation, depending on who has the most leverage," notes Yvette Fung of Synergis Holdings, a Hong Kong-based management firm. Choy agrees: "At the end of the day, as you may well appreciate, it's all a matter of bargaining power between the parties concerned."

There is a California-based business research outfit, Consus Group, that specializes in providing intelligence about contracts, deals, industries and companies. They have several international distributorship agreements as well as related contract agreements on their Web site that are available to purchase and download for a small fee. It would not be a bad idea for you to look at some of them and get an idea for how such deals are typically structured. Good luck!

Have a question about your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.
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