Legal Counsel for Sales and Distribution Activities

December 30, 2015

4541The role of a Business Counselor goes beyond risk mitigation and contract negotiation.  Attorneys can provide more value to their business clients when they fully understand the business and the industry within which it operates.  Are you ready to counsel a growing business that now needs a dedicated team for its “Go to Market” operations?

Once the ideas for new products have been identified and vetted and the product development process is largely completed, the full attention of the company should be focused on the activities directly related to promoting and selling the products and tending to the post-sale needs of customers with respect to service and support.  In the initial stages of the company’s development reliance is often placed on one or more of the members of the founding group with significant experience in sales and marketing and, in fact, many companies are established in order to meet a need in a specific market where the founders have worked in the past.  However, as time goes by, and the company matures and expands, experienced professionals will be brought in as senior managers of the sales function to create and develop sales channels for the company’s products.  Even when companies have brilliant ideas about solutions for their customers, they will not be successful unless and until they figure out the best way to close the sale.

Sales and distribution activities are covered in Business Transactions Solutions §§ 85:1 et seq. and you’ll find a large library of practice tools and other resources to make you an effective business counselor to your clients with respect to their efforts to monetize their products and services.  Want to get started?  Well, here are some important things you need to know:

  1. Among the key factors to consider when developing the initial sales and distribution strategy is the nature of the product and required sales effort and the size and composition of the target market.  For example, if the target market for the initial product is relatively narrow or the sales effort is focused on a small number of potential original equipment manufacturers, then it is likely that the firm will elect to emphasize a direct selling effort using either in-house personnel or “manufacturers’ representatives” who are compensated on a commission-only basis.  However, although it is certainly possible for one company to possess the financial and technical resources for internal development of products and direct sales of the products to end users without the use of intermediaries, it is more likely that one or more outside partners will eventually assist in distribution.  Engaging with sales representatives and distributors allows companies to minimize the costs of creating and maintaining an internal sales force, the cost of which can exceed the cost of developing many products.  Creation of an in-house sales team is also not warranted, or cost-effective, when the firm is entering a market in which the customer base is fragmented and individual sales transactions involve relatively small dollar amounts.  In those situations, the firm must base its sales strategy on developing a network of independent sales representatives and/or distributors that already handle a broad line of similar products in the target market and who are willing to carry the company’s products as additional items.
  2. The advantage of outsourcing sales activities is that sales representatives and distributors are in the business already, have established accounts, and can accelerate the time to market.  Even if such sales representatives or distributors are asked to handle the company’s products on an exclusive basis, and not sell any other products, their experience will make the roll out much faster.  A side benefit of hiring individual sales representatives as independent contractors is that they are not employees, and the restrictions in many jurisdictions on hiring, treatment and termination of employees do not apply.  On the other hand, selling through outside agents can be a challenging undertaking for small firms with no track record and little initial bargaining power with the agents, particularly larger distributors who prefer to focus on products that have already established themselves as high volume items and the distributor’s sales personnel rarely have the time or qualifications to engage in the direct sales effort normally required to inform customers about the attributes of a new, and relatively unheralded, product.  The relationship with any distributor will usually be conditioned upon attainment of agreed minimum sales volumes and slow moving products will generally be dropped by the distributor after an initial trial period.
  3. Sales transactions will be governed by applicable laws and regulations pertaining to the content and enforceability of sales contract, such as Article Two of the Uniform Commercial Code in the United States.  Other legal issues which should be considered when offering and selling goods, either directly or through intermediaries, include product liability laws; government product testing and safety requirements; antitrust laws; intellectual property laws; laws proscribing the use of deceptive acts and practices in the sale of goods; consumer credit laws and regulations; export controls and import laws of foreign countries in which selling activities are occurring; foreign laws relating to the relationship between foreign manufacturers and any local agents; and anti-bribery laws.
  4. The sales and marketing functions can lower production costs by increasing demand for the product and the lower costs can be converted into higher margins or lower prices that contribute to even more success in the volume of sales and the level of market share.  The sales and marketing functions can also create differentiation advantages by creating and implementing sales and marketing strategies for targeted customer groups, tailoring product designs and features to customer requirements, and developing and promoting brand names. The important elements of the business plan for the sales activities of any company should include a statement of the overall mission or purpose of the plan, identification and description of specific goals and objectives and an explanation of the strategies and tactics that will be deployed in order to achieve the stated goals and objectives.  Creating an effective strategy calls for consideration of pricing, promotional techniques, negotiating strategies, opportunities for adding value for prospective customers, service and support capabilities, technology relating to sales activities, internal processes for reviewing and approving sales transactions, design of the sales organizational structure and implementation of effective sales compensation programs.
  5. Use of sales agents varies depending on the industry, the specific market and competitive conditions; however, studies have found that a significant number of companies rely on outside sales agents for support in promoting and selling some or all of their products.  Companies must consider a number of factors when choosing the appropriate mix of internal and external sales activities including cost and efficiencies; the nature of the market, sales force factors, internal expertise and resources and the nature of the product; and how much control the company needs over the sales process.
  6. Outside sales relationships can take a variety of forms including sales agency arrangements, basic distributorship arrangements, original equipment manufacturer arrangements; manufacturing and distribution licenses and dealership arrangements. While many companies provide short-term rewards and bonuses for distributors that are successful in their sales activities, the most successful companies develop and implement formal reseller programs that form the basis for forging and maintaining long-term relationships based on shared visions and goals.  Reseller programs should include various rewards and incentives including marketing dollars, product and training discounts and other support; however, it is important for the company to condition these items on attainment of clear and mutually agreed revenue and profitability requirements.  In addition, once the reseller relationship is in place, the company should be prepared to work on building the relationship and maintaining close communications.  Finally, the program should establish procedures for measuring the performance of resellers against the goals and expectations included in the program and conducting period reviews of the relationship.
  7. The key design principals when designing the sales organization structure include building around the most strategically appropriate marketing dimension such as geography, products, market, types of sales activities or specific large customer accounts; striking the proper balance between the need for centralized authority and providing managers and salespersons at lower levels with sufficient latitude to make decisions needed to close sales transactions within acceptable parameters; and processes for coordinating activities among different sales groups working on common projects or types of accounts.
  8. The enthusiasm and effectiveness of the sales team, as well as the way they go about organizing their sales presentation and negotiate with customers, are highly dependent on the sales compensation plans adopted by the company.  When the sales compensation program is properly designed it will provide incentives for salespeople to act in ways that support the business objectives of the company and will clearly reward those salespeople who are able to make the type of contribution thought necessary by senior management for the company to succeed.  Companies generally rely on some mix of base salary, commissions and sales prizes; however, practices vary by industry and it is important to carefully evaluate the plans offered by competitors as part of the process of designing a compensation plan.  The terms and conditions of any commission or bonus plans should be clearly stated to avoid misunderstandings.  Companies should revisit commission and bonus plans on a regular basis and should consider structuring such plans to create specific incentives for certain activities such as the pursuit of business from new accounts.