Negotiating Supplier And Distributor Agreements (Reports From The IFA Legal)

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Fox Rothschild LLPThe first step in creating or renegotiating a supply chain is understanding its component parts, and the roles each part plays: Producers, Manufacturers, Distributors, Retailers, and Consumers. These roles are not exclusive. For instance, the producer of a raw good, such as milk or software code, may also be the manufacturer of the finished good or service (in either case or collectively, a “supplier”), and manufacturers often handle distribution themselves, especially if the franchisor is the manufacturer. A franchisor could theoretically be the producer, manufacturer, and distributer all at once, and the distributor could also be the retailer if the franchise offers just-in-time direct delivery to customers. The exact structure of the supply chain and its elements thus depends on the nature of the franchise system. The consumer naturally stands apart and is the final stop and ultimate driver of the supply chain.

The end goal of the supply chain is to ensure that each element achieves service consistency and quality control as the strength of the brand depends on these. It is therefore critical to pick the right vendors. The selection process usually begins with a request for proposal (“RFP”). The RFP, which is driven by businesspersons, typically includes key elements of performance, leaving particulars to the eventual written agreement, which is often drafted by lawyers. Nonetheless, a savvy franchisor will communicate deal-breaking issues at this early stage. Other key concerns in the selection process are geography and reliability/quality control.

In creating the supply chain, franchisors should anticipate and plan for hypothetical events. What happens if the supplier does not deliver? What is the backup plan? What if the franchise system outpaces the supplier? What are the supplier’s financial limits? A franchisor could find itself in dire straits if its chief or sole supplier gets into financial trouble, including going out of business. It may make sense to build competition into the system, or at least experiment with this idea, but franchise systems might want to avoid dependency on a single supplier. Having multiple suppliers creates an internal market, gives the franchisor bargaining leverage, and provides a backup plan. That said, some franchisors have successfully and profitably used a single supplier for decades. It depends on your system’s desires and needs. Incidentally, it should not be a major problem for suppliers to guarantee or indemnify their services, and a franchisor should be wary of any supplier who refuses to do so.

While the rest of the presentation addressed key terms of supplier (pricing) and distributor (inspection rights) agreements, the speakers made special note of the need to address ownership of intellectual property in supply agreements. The bigger the system, the greater the chance that a franchisor will create new technology that offers benefit to the whole system. Franchisors should make certain that their ownership rights are clear from the agreement. Another oft-overlooked concern, for both supply and distributor agreements is licensing. If any role-player in the supply chain is not properly licensed to exist or to move or offer certain goods or services, it could shut down the entire chain pending legal and/pr regulatory compliance.

The IFA Legal Symposium occurred May 7-9, 2019 in Washington, D.C. Several attorneys attended this event and took away numerous tips. This post is one of a series of posts reporting from this event and summarizing details from the sessions. This post is based on the session entitled Supply and Demand: How to Negotiate Supplier and Distributor Agreements and Work with Franchisees Regarding their Implementation, presented by David B. Ramsey (Kaufmann Gildin & Robbins LLP), Curtis S. Gimson (Arby’s Restaurant Group), and Robert G. Huelin (Wireless Zone LLC).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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