Practical Due Diligence on Distributors–it is possible!

If your company is thinking about expanding into the US market, chances are that you’ve considered a distribution arrangement (or something similar) with a US person or entity. You may even have been inundated with offers from ‘eager’ third parties to be your distributor, agent, etc. One frequent question is how can an Irish/NI company gather and analyze enough information about a third party to make a good decision about whether to engage with that person/company. Based on experience, it’s better to ask that question before you enter the US market (and before you sign anything), because unwinding a bad distribution/sales agent/etc. arrangement is time-consuming and can be expensive. I don’t enjoy the unwinding part because, at the end of the day, the Irish/NI really doesn’t ‘win,’ despite the result of the unwinding. I know, lawyer suggesting something that could result in less work…

So, how can you effectively diligence your potential US partner/distributor/agent/etc.? I’d first say that the diligence process should be an ongoing process–before and during your relationship with your US partner/distributor/agent/etc. Before you enter any agreement with a potential partner, you should (i) execute a nondisclosure agreement (more on that in a later post); and (ii) gather as much information as is reasonable (and that will be driven in part on the size of the potential relationship as well as what you may want the partner to do).

For example, you should ask to see the partner’s state registration/business license (a copy of what they have to show that they are, in fact, validly existing); perform a judgment/litigation search to see if they’ve been sued or have any kind of judgment against them; speak with their other customers/clients–and ask those clients for contact information other of the potential partner’s clients (in other words, don’t stop the inquiry at the level of those contacts the potential partner has provided); and ask your friends/colleagues in the same geographic area as the potential partner if they have hard of that partner–good or bad. You want to be sure that the potential partner is in sound financial shape (you really want to avoid having a bankrupt/insolvent entity holding your product as inventory) and you can ask about the potential partner’s banking and other financial relationships.  Ask yourself if the potential partner really would be able to deliver on their promises–are they talking about quickly delivering huge revenues but they only have one employee? What experience do they have–be careful of potential partners who rely too heavily on ‘connections.’ There may be (and probably are) other information items you might seek. You should ask the local US offices of Enterprise Ireland and InvestNI for their guidance–they are effective in understanding local markets. You could, and probably should, ask for all of this information through a due diligence questionnaire–something that you should put in place and consistently use before entering into any contract. And don’t ignore your intuition–if something about a potential partner seems ‘off,’ chances are…

One common mistake by non-US companies is assuming that the diligence process ends at the time the relevant contract is signed (US companies operating outside of the US often make the same mistake). Among other things, the contract should allow for termination if, for example, certain sales targets are not met, if the partner goes bankrupt or if it otherwise breaches the agreement. The contract should require the partner to provide you with periodic financial and performance updates–and promptly respond to any inquiries you may have outside of the periodic reporting. You should review those reports/books/records–do it consistently, because problems can arise if the partner thinks the Irish/NI principal is not paying full attention. In other words, keep a form of the diligence process going throughout the contractual phase of the relationship.

2 thoughts on “Practical Due Diligence on Distributors–it is possible!

  1. HI
    I have read your comments and , having suffered from one very bad experience of such a partnership, agree heartily with your various caveats and recommended procedures.
    As I now wish to try again to find a partner for our software and services, (patented retail credit risk management software and management consulting,) and with the assistance of the US Ei office have had a number of discussions, inconclusive to date, would be interested to see what your company may be able to do to assist.?
    Patrick Shallow PhD FIB
    Nova UCD
    Dublin 4


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