Hello, and thank you for joining us.I am Melissa Travers, Director of Community here at BevNET Inosh, and I am pleased to welcome you to The Nombase Podcast.Don't forget to check out nombase.com, BevNET's platform built for the CPG community.It's where you can find episodes of this podcast and so much more.Today, we're talking about distributor contracts, those complex, high-stakes agreements that can have a major impact on your brand's ability to grow.We are joined by Kyle Koehler, founder and CEO of Wildway Foods, who will share what he's seen and what he's learned, and Kara Posner, partner at Giannuzzi Lewendon for the legal expertise to help navigate these agreements with confidence.Distributor contracts are notoriously tricky, and hopefully today we can dig in to the red flags and the green flags that will help all of you out there navigate with a little bit more ease and confidence.So thank you both so much for joining Kyle and Kara.Just a quick round of introductions.Kyle, please tell us about your role and about Wildway.Yeah, of course.Thank you for having me.I'm Kyle, founder and CEO of Wildway.We are a breakfast and snack food brand and manufacturer based down in San Antonio, Texas.Kara, so good to have you here as well.Very nice to be back.I'm Kara Posner, partner at Giannuzzi Lewendon.We are a CPG focused law firm based in Manhattan.And all we do every day, all day is help founders navigate agreements like this and many, many others, all with a goal towards that eventual exit event and with a lens towards the things that can cause hiccups along the way.Fantastic.And this whole conversation actually came about, Kyle, from a LinkedIn post.And I think you said that you were laughing at how ridiculous this one particular contract was because of everything they asked.Let's back up actually and talk about the brand itself.So tell us a little bit about Wildway, your origin story, how long have you been doing what you're doing?Where are you?That kind of thing.So the brand's 13 years old this year.We started back in 2012, very organically, farmers markets here in town, here in San Antonio, and just grew very organically from there.We self-manufacture everything here in San Antonio as well.So it's always been, we've always been a self-manufacturing facility and brand.We grew very early in the natural channel with retailers like Whole Foods here locally in the Texas region and just grew organically with them, with a few other natural retailers.And then over the years have kind of expanded our distribution throughout grocery retail a little bit and just a little bit of conventional channels but mostly natural.And then I've expanded outside of retail to food service channels and e-commerce as well.So we're pretty well diversified in terms of grocery retail and food service and e-commerce at this point.And how many doors are you in at this point?That's a great question.And I don't really know, to be honest, it's not really something that I track.To be honest with you, it's fluctuated wildly over the years as we've learned a lot and made many mistakes along the way.But it's not really a metric, to be honest, that I track in terms of kind of where we're at and how many doors that we're in.Well, let me ask you a more pertinent question.How many distributors are you signed on with?That's a good question.Two today, only two.And that has been, gosh, that's been a journey, a long journey.We were only with one distributor for the longest time.I would say for about a decade, we made a strategic decision to only bring on one distributor and strategically only grow with that one distributor and not bring on another.There were some smaller, I think, local regional distributors spattered in throughout the years, but nothing long-term and nothing as consistent as big national distribution.How long did you have this only one distributor for?For 11 years, only one.I would have to assume that this distributor has national reach, right?Yeah.They have national reach and we just made a conscious decision that if we were going to grow, we're not VC funded, we're not PE funded.We've been very under-capitalized as a business throughout the course of time, and we've had a lot of really good advisors and mentors early on that said, if we're going to look at retail distribution, especially on a national scale, just be disciplined and careful how you do it, because it can be very expensive.And so we made a conscious choice that as we grew nationally, that we were really only going to subject ourselves to one national distributor and the retailers that came with that, until we knew that we were ready to take on another one.And how did you decide which distributor to sign on with?Because if you're not signing on with the others, then oftentimes that means that you're passing up retail opportunities there.Yeah, it was really determined by the retailer, by the initial retailer that took us on.They dealt with one distributor and we signed on with them.And then after we signed on with them, we said, okay, this is the path we chose and we're going to take this path and see how it goes and go from there.Kara, I'd like to hear a little bit more about you and Giannuzzi Lewendon.These distributor contracts are things that you're helping other brands negotiate all of the time.What kind of support do you give to brands?Are you helping them sign the contract?Are you helping them out of the contract?Or is it both?It's often both.And I'll back up just a little bit to give a little bit more background.So as I mentioned, we are a law firm, which, you know, candidly, it's kind of like a commodity in CPG.If you're going to do what you expect to do, you're going to need the legal help at many different phases and many different important phases.So we do three primary things for our brands.One is all the day to day contract work, which is where the distribution agreements we would say falls into.Two, all the financings along the way, we're probably doing two to four hundred financings a year, anything from your first safe or note to the nine-figure minority investment from a strategic with a right to buy the rest in three years and then third if all goes well, the M&A.But what we're really doing along the way, especially in the context of agreements like distribution, is making sure that they jive with the founders' eventual goals, which not really met a lot of founders who want to pass the business to their kids.They want to work really hard for a certain number of years and hopefully have an exit event and pass along their brand to the next good steward.On the distribution front, we're probably doing 200 to 300 of those a year.What's really fun about that is that our library of precedent is so developed at this point, over 20 years.The counterparties are pretty much the same.The issues are certainly the same.We have a lot of built-in data that just isn't really out there for our founders based on what we've seen actual brands get both in the signing and in the termination.I think that that's probably one of the most fun things about our job is being able to provide that, almost being in a strategic extension of the management team, as opposed to just the lawyer marking up the contract.What are some of the biggest issues that you see brands encounter with distributor contracts?Yeah, I'm sure Kyle is well-versed in all this, but termination is always something you want to be thinking about at the outset, which feels a little awkward, right?You're trying to enter into a partnership, everyone's in good spirits, yet you hear you're talking about, how the hell can I get out of this thing?But it's actually one of the most important issues.We try to work with founders to think about the scenarios in which they would want to get out, whether that's behavior of the distributor taking on a competing product, for example, or perhaps they don't service certain accounts, or perhaps they've neglected certain accounts.We're always trying to figure out how to install enough escape patches that keeps both parties incentivized to do the right thing and try to grow the brand, but also gives the founders an out when things aren't working out.Another big topic is always termination multiples.If you're terminating without cause, chances are you're going to pay a buyout, very normal, very standard.Around that, we want to make sure that if you're terminating with cause, whatever that means, whether it's failing to hit minimum purchase volumes or doing something really bad or having a PR scandal, that the buyout wouldn't apply or perhaps it's discounted.Termination, figuring out what that costs, when you can do it, how you can do it, and how hard it is is probably the biggest issue.The second issue, and this is all with that lens towards exit, is how does the contract interact with an eventual exit?For example, if you're going with a distributor that has a relationship with a strategic, does that preclude you from talking to other strategics in the context of a sale process?Or does the contract say you need the distributor's consent to assign the agreement?Well, if you do an asset sale, you're going to have to assign it.So making sure that there's no shakedown opportunities or glitches in the agreement that can cause headaches at the time of an exit or at best writing a big check for no real reason.Well, great information, Kara.And we're actually going to get into some of those, you know, need to know items a little bit later on in our conversation, just so folks know what to look out for.Kyle, you have learned so much from the brand side.What are some of the decisions that maybe you made that you would have done differently later on?And alternatively, what are some of the decisions you made that you're really grateful that you made when you made them?I definitely think some of the mistakes we made early on were probably very typical, I think, of a lot of early stage founders in this space, is that a lot of like, we didn't know a lot of what we didn't know, right?We just didn't know a lot of what we didn't know.And that led to a lot of the mistakes.I mean, first one, thinking that like some of these contracts or distributor relationships and partnerships in general, it was very black and white.We thought coming into this like, I didn't have a background in CPG or food when I started the food brand.And so, we just thought, hey, this is a company that gets my product from A to B, and it's pretty as simple as that.And it's pretty black and white.And we realized very, very quickly that that's not the case, that there's a lot of gray and a lot of nuance to these contracts and these relationships.And so I think just going in, just very naive to a lot of that stuff led to a lot of mistakes.I mean, I think early on, we didn't think we could negotiate a lot of anything at all.And so that led to a lot of working backwards and going, okay, well, shoot, I didn't realize we agreed to this and agreed to that.And so that caused a lot of problems early on.And then I think, early on, another mistake that we made was, I guess, assuming that the distributor and the distributor relationship, that they were gonna do everything right, and they had all the data to make all the right decisions.When in reality, we've learned time and time again, and probably dozens and dozens of times at this point, that that's just not the case, right?That they have to be managed just like any other function of your business.And so, in those times when we failed to manage what they're doing, or how they're ordering, or this and that, we've always run into issues, and when we run into problems that we end up having to bear the brunt for.And so, I think a lot of it was just coming into these kind of relationships and contracts really naive, and not knowing what we didn't know, and not knowing what we needed to ask and could ask.And so, over the years, we've amassed a really good network of mentors, advisors and other founders to be able to ask some of these questions too.And that would be definitely one piece of advice that I have for others in this space is that the CPG world is very, very small.You go to Expo West, you probably think, oh my gosh, it's massive, it's huge.And the reality is it's pretty small.It's a pretty small industry.And so, the likelihood that someone else has been where you're at and gone through some of the things you've been through is pretty high.So definitely use that network and ask.I think some of the things that I'm grateful that we did right was strategically only working with a small number of distributors early on, especially not being well capitalized.I think if you're well capitalized, it's a very different, you're running a different business and you have different objectives.But I think just being very disciplined early on, especially as an undercapitalized business, was one thing that I think we did really right.And I would say also kind of fighting for what we thought was right and what we thought was fair and setting boundaries really early on with our distribution partners, I think is something that we did really right.I mean, I hear a lot of the time from founders and especially early stage founders like, oh, my distributors owes me $50,000 in their past two terms.And after they pick up all my orders this week, that'll be $75,000.And my question is always like, why are you still shipping to them?They'll be that much money, right?And so I mean, I think, again, it's different decisions for different businesses and founders, but we've been very diligent about setting very strict boundaries of like, hey, like if you don't pay us on time, like we're going to stop shipping products until we get paid, right?And just like straight up, like that's it.And just letting our distribution partners know that like we're just, we're not going to mess around with certain things like that.And we're going to expect to get paid when the contract says we should get paid.And so I think those are some of the really hard decisions to make, especially when it's, you know, for a new retailer launch or retailer that, you know, if you don't get something there in time, you could be out of stock.And those are tough decisions to make, but at the same time, I've seen a lot of people, you know, let their distributors kind of walk all over them in different ways and without setting a boundary, like those things aren't going to change at all, ever.And so one thing that I would say that I think we've done right is try to set really good boundaries with our distribution partners to what we think is right and fair and stand up for ourselves in that way, you know.Touching on the point you said, Kyle, about the community feeling big at first, but actually being really small.I think that's probably one of the biggest learnings for us as a firm, having grown sort of right along with the industry.So I think, you know, as a younger brand, making sure that you're not scared to have those conversations with other founders and with your advisors is very important, which it sounds like is something that Kyle considers they did, you know, right along the way.Kara, Kyle mentioned that because they had discipline in the beginning and they didn't choose a large number of distributors, that kind of kept things tight.Do you find that you encounter brands who all of their distributor contracts are almost overlapping each other and constricting each other?How does that look when you really do have like a considerable number of distributors and you have all of these contracts which may have exclusivity clauses, you know, geography clauses, that kind of thing?Yeah, I mean, it's super brand specific as to how you want to roll out there.And, you know, in some cases, concentrating with one or two is best.And in other cases, you know, like when we sold vitamin water, I think they had 450 distributors that all needed to be terminated.And so that was a big exercise to make sure that we had done all 450 contracts right.So that when, you know, Coke came in and obviously put them in their system, that it was very clear what was owed, how to do it, how many days notice.So yeah, it varies.And if you are going to have multiple distributors, it goes without saying, make sure you understand where the territories are.Make sure you understand what the excluded accounts are and each of them and how they overlap.Because if something sits idle and perhaps has been violated, let's say for multiple years, and then God forbid you have a consent right in the back when you have a change of control or a sale event, and you go to ask that distributor for the signature, it could be a shakedown opportunity, which we've seen from distributors, manufacturers, just contract trip ups where the lawyer sees an opportunity when you need their signature, and it really messes up the deal or devalues it or delays it, or in the worst case, kills it.So yeah, being mindful of how they interact with each other if you're doing multiple distributors is very important.Kyle, you mentioned that there are things that maybe you wish you hadn't agreed to in the beginning, not sort of understanding that the contract was negotiable.I think it would be very helpful for some of the other brands out there who may be in the process of signing an agreement.What are some of those things that you agreed to that now you wouldn't?Gosh, I would think some of the simpler ones that I think are pretty standard in most distributors contracts and also pretty standard in the industry is just like things that you just have to pay for, have to do, that as an undercapitalized brand, like we had no business in doing or signing up for.I mean, I think like the automatic free fills right for stores is probably one that like we didn't really understand the impact of.And then as we started getting all these started backs and we're like, what are all this coming from?Like, what is this store?Like I have no control over the store.I don't know who's shopping there.Like, I don't think this is my target customer.And so, you know, start digging into those things that have an outside of your control.And so I think that that's one thing that again, it's just, again, it's maybe a little different if you're a very, if you're a well capitalized business and have different plans and different growth plans.But I think the majority of CPG businesses are pretty undercapitalized.And so something like that could really hurt your cash flow and also hurt your brand.You just don't have any control over the stores that it's going into and who's getting that free fill and what the customers that are shopping at that store.So that was certainly one of them.You know, another simple one that's kind of baked in, I think most distributed contracts is just is a spoilage percentage, right, for spoils.You know, most of our products have 12, 18.We have products with a 24 month shelf life.Like there's no reason why we should have any product spoiling out anywhere, like any sense of that.So to like to pay this automatic, you know, like spoilage percentage on products that had an 18 month shelf life just seemed ridiculous to me.And again, another one of those things that like, wow, we didn't know what we didn't know.I used to didn't know to ask like, well, what is this?And like, why is this a supply to me and my products that have a really long shelf life?And so again, a lot of it was just being really naïve and just not knowing what we could and could not negotiate or didn't know what we should and shouldn't look for.And so those are just two, I guess, kind of simple ones that I think are pretty standard, like baked into most contracts that most, I think most founders kind of glaze over and like, ah, well, it is what it is.Like those are those things that are in there.And then once you kind of dig in into kind of the margin numbers and once one or two percentage points starts making a big difference to you and your brand early on, you start to realize like, oh, these are things that I probably shouldn't be paying for.And I don't know why I automatically signed up for these or agreed to these in the beginning.Going back just to piggyback on what Kyle said earlier on that same topic is some of these terms seem so black and white and so binary and, you know, concepts like termination, you have to have them.It's going to stay in there, but we love creating what we call like bifurcated situations based on behavior.So a lot of times you'll get a distribution agreement and then at some point it'll say upon any distribution or upon any termination, you know, the brand owes this buyout.Well, how did termination happen?Was it because the distributors literally stopped placing orders?Was it because they didn't pay us?You know, creating those behavior based situations where, aha, it makes sense that I shouldn't have to pay you for being an absolute failure, right?We see that a lot with like investment bank or engagement letters, you know, the tail fee that applies if they don't sell the business.Well, why did we stop working together?Was it because you stopped answering the phone?Was it because we decided we wanted to pause the process?So making sure you think about the behavior of the parties and how that should influence, you know, who owes what and how you can part ways or mend or whatever is very important.And did those specific items that Kyle mentioned that he knows more about now than he did before, do those resonate with some of the most common problems that your clients have, like spoils allowance?For example, is there any sort of generalization that you can make to help people understand what they should expect there?Yeah, I mean, spoil allowance is a good one to point out.Half the time, on these economic terms, we're just highlighting and say, hey, founder, make sure you read this and saw it and understand it.It's not so much a legal thing, it's an economic consideration, so even just bringing those to the forefront.The most important thing a founder can do is actually read these contracts.That takes you a long way because you have that business mind.But pointing out the economics, make sure you understand how it's actually going to play out versus your shelf life.If you have a shorter shelf life, then maybe the higher spoilage makes sense.If you have a longer shelf life, maybe there should be no spoilage.So highlighting those economic terms that may seem buried in the boilerplate, and then just making sure that the legal matches up with how you expect the relationship to work out.Kyle, in our conversation, you were talking about how you see these contracts as a partnership between you and the distributor.What do you mean by that, especially understanding that oftentimes they're asking for such egregious things?How do you build a two-way partnership in a situation where maybe you feel like you're getting pressed?Partnership is a good way to put it, because they should be partnerships, right?They should be win-wins, right?The distributor should be providing a service to you in return.You know, that distribution should be compensated for the work that they're doing.But a lot of times, they're not, you know, they're always going to be one-sided, I think, in favor of somebody, right?No contractor agreement is going to be true, like 50-50, right?I feel like that's pretty rare, especially for emerging brands coming into this space.It's not likely that you're going to get a distributor contract that is completely 100% like FAIR, right?As you would call FAIR, 50-50.And so, you know, know that these distributors are going into business as well, right?They have obligations to do that.They're taking a risk by taking on your products, right?So there's certainly going to be things in those contracts that's not in your favor, and that's certainly in their favor.But at the end of the day, it still needs to be a reasonable partnership, right?And so there's certainly some distributor contracts that I've read over, and I'm like, oh my gosh, there's no way that I win at all here.Like everything under the sun, like I'm going to be paying for everything, win or lose, like these costs are going to come back to me at some, all the time.And so I think it's just important to understand those things.Like Kara mentioned, just pointing those things out, the economic implications of them, and just go into it knowing what things are required of you and what things the distributor is going to require of you in order to continue to distribute your products.Because it's never going to be 50-50, but it definitely should be a partnership, right?The distributor should be upholding their end of the bargain, getting your product into the stores, how they said they'd get in it there at the time they're saying that they're getting it there.And they deserve to be compensated for that.But there's also, you know, but going back to what I mentioned earlier about boundaries and things like that, there's definitely boundaries that you should be setting as well and understanding that this should definitely be a win-win partnership.And keep definitely keeping that in mind, going into reading these contracts and going into those agreements.You mentioned that you are also in food service channels and you may be in other channels, club, drug convenience.Have you noticed any difference between the distributor contracts that you see from sort of natural retailers versus the kinds of agreements you're seeing from other channels?Yeah, they're definitely different.They definitely have their own kind of nuances.The food service channels is just kind of a spiderweb of a lot of different distributors and a lot of different players.So that can definitely get mucky in terms of exclusivity and regionality and all kinds of other things.But at the end of the day, there's very similar things to kind of look out for in terms of guaranteed sale, payment terms, all these types of things.There's a lot of similarities within those contracts as well.But yeah, they definitely each have their own nuances.So definitely don't look through one distributed contract.I think you've seen them all, right?I think, oh, this is going to be the same as the one I just signed, right?Even if it's the same sales channel or same part of the country or same customer even, because they're all going to have their own nuances and their own differences.So definitely take the time to read and understand and learn what all those things mean, because they're all definitely different, for sure.Yep.And just to piggyback on that, I just remembered one of the simplest concepts you can have in your distribution agreement to make it clear is that purchase orders are subject to acceptance, right?Some of them are drafted such that the distributor places the order and then the supplier fulfills it.Well, what happens if we have a facility issue or there's some other interruption in production, you could accidentally get into a situation where you're doing all the right things, yet you're not fulfilling orders because you can't and you're in breach, and then maybe they take that as an opportunity to terminate and trigger the buyout or whatever.So just even paying attention to the basic stuff can really go a long way.Kara, how about you?Are there any noticeable differences or similarities across different distributors in different channels?So maybe you take Natural, maybe you take Conventional, C-Store, Club, Drug.Is there anything interesting there?Yeah.I mean, the biggest thing is probably negotiability, I guess you'd say.With the big Nationals, we've seen their forms a million times and they do show some flexibility in situations, but you're less likely to really push them off of their standard policy.Whereas you're dealing with a smaller regional distributor that really just wants the brand, you have a lot more flexibility as you should, because the playing field is a bit more even.There's also a lot of differences between categories, food versus non-alcoholic beverage, alcohol versus non-alcoholic duty and personal care.We're keeping a sense of how those agreements vary and what's normal and market at any given moment, but there's definitely some differences, which to Kyle's point means that you can't just get the next one and assume you know everything and skim it and sign it.You got to make sure you really understand what that particular distributor is wanting.These are all great points.I hope everyone is jotting things down.Why don't we talk a little bit about some of these issues and their impacts on margins and profitability.What I thought might be fun is Kara, I'll sort of list a topic for you and if you could explain it, and then Kyle, if you could follow up with what its impact on profitability is.Let's start off with minimum purchase commitments.Kara, tell us about this one.Well, this is definitely what I'd consider an optional thing.Honestly, we don't see brands or we don't encourage brands to use it so much as to guarantee revenue or guarantee certain amount of volume.We more so see it in the way of creating an escape hatch for underperformance where you can get out of the agreement and ideally not pay a termination fee under the theory that, if you're not meeting the minimum purchase commitment, and generally that is a true minimum floor, it's not some sales goal, that this relationship probably isn't working out.Yeah.I would say the impacts that that can definitely have on an early stage brand cash flow wise is just understanding, one spoils and understanding the retailers that you're launching with.I see a lot of brands that want to have a high minimum purchase order commitment to drive volume, to drive revenue, but then they launch in a store set that can't, the store is not big enough, there's not enough doors to justify those size orders.They have products sitting in a warehouse, and they have product codes out, and they have to end up paying for that back, or they have to put it on deal, or put it on sale.I always encourage founders that they're going to do something like a minimum purchase commitment to err on the smaller side just because of that.You can always order more.But if you say, hey, you have to order the whole pallet, but you're launching in a store set that can't support that volume, it's just going to cost you a lot more in the long run than in the short run.Just another example of how brands are having to make decisions all the time based on almost no information.It's a tricky one.Next up, territory exclusivity.This is certainly one that I hear is more of an issue.Some distributors than others.Kara, tell us about this one.Yeah, so territory exclusivity just means that you're agreeing to give a distributor a certain geographical region or perhaps a certain channel, and you have to stay with them for those channels.One thing we want to make sure that the agreement reflects is that if for some reason their coverage within that geographic region or that channel drops off, for example, a retailer refuses to work with them anymore because of one reason or the other, that that falls out of the territory and that you're able to go into that territory or account without having to pay an invasion fee or other financial penalty.Yeah, that's a good one.And it's not one that we've dealt with a whole lot, to be honest, and not one that I'm super familiar with, but a really good example we could talk about is what just happened with one of the big national distributors and the fact that they were unable to fulfill a lot of their obligations due to a cyber attack or what have you that happened.And if you're locking in some exclusivity with them and then can't fulfill orders and don't have another option, then that can hugely impact your cash flow and your retail relationships and all those kinds of things as well.Next one, and this is everyone's favorite, chargebacks and deductions.Yes, chargebacks and deductions.This is one of those situations where you just boldly highlight it and scream in the email to the founder, make sure you understand this and how it economically impacts you.But it varies from distributor to distributor and brand to brand, what they're willing to accept on this front.What's important, I think, for a lot of founders to understand, too, is that a lot of these chargeback and deductions are things that they have, whether they realize or not have agreed to, right, that are coming back.I think what gets a lot of early stage founders in trouble from what I've seen is just the timing of a lot of these.And it's really hard to understand, like, when things are going to get deducted and to what extent, right?We've done promotions in January and haven't seen that deduction come through in October, right?Along with a promotion that we ran in September, right?And so it's like, what?And so, you know, when that happens, you have a really big promotional activity that happens in Q1 that doesn't get deducted into a Q4, along with a bunch of other promotion activity in Q4.That can hugely impact your cash flow if that's all coming out in the same checks in the same month, right?And so that timing aspect is definitely something that can sneak up on a lot of people.And so I think it's just important to keep a separate kind of AP, some sort of way to track all of your promotion activity and guesstimate like, hey, I still have this outstanding.It's going to come out at some point.I'm not sure when.And distributors have gotten a lot better at putting a lot of this information on their portals and things like that as well for you to be able to log in and say, okay, well, here's, I have this deduction that came out and it hasn't come out of my check yet or things like that.So that communication has gotten a lot better.I think over the years with the distributors, but the timing aspect of it, I still see as a big issue for a lot of promotion activity.A lot of founders who, you know, maybe they forgot, they ran a BOGO in January for New Year and New Year, and then all of a sudden, September, October rolls around and there's this massive deduction that gets taken out.They're like, oh my gosh, I thought that that was paid for back in March, and they kind of forgot about it at that point in time, and then they can have big impacts on cash flow.Yeah.Kara, I don't know how much this plays in, but audit rights and transparency, does that factor in?I can't speak to the volume at which you'd want to know what's going on along the way, but it is certainly a topic for termination when you're talking about the buyout fee.If you have a multiple or a payment calculation that's based on gross margin or gross profit, because then you're needing to really understand the behind the scenes calculations, which is why a lot of times if we can get it, we love a clean flat dollar amount per case or per pallet or whatever as a buyout, because then there's no fighting.It's a stagnant number.It never changes.It typically swings in the founder's favor because you're thinking about it on day one, not in year six.But yes, audit rights are important, but we're usually interacting in the context of termination.I would just add to that too.I think it's equally as important for the founders and brand owners to keep really good internal records as well of what they're sending to distributors and all of their dealings with distributors, because that can come in just as handy as it can in all of the distributors' records, right?I mean, we've dealt with situations in the past where we've gotten charged back for a spoiled product, but we've kept such good detailed records of what we sent that we said, hey, actually, you didn't really use FIFO, you sold a newer product before an older product, and that's the way this got coded out as evidence that we should get paid back for certain deductions and chargebacks.And so I think it's equally important to keep really, really, really good records, you or your coat backer, whoever that is, of what you're sending to the distribution, when and how, so that when it comes time to audit your own records and things like that, you have as much detailed information as possible, and you're not solely relying on the information that the distributor may or may not provide you.Distributors can have pretty hefty marketing spend requirements and trade programs that you're expected to participate in one way or another.Kara, how do they show up in contracts, and what can you say no to or say maybe less to?Yeah, I mean, we try to encourage our brands to at least agree on a split, you know, so that you're not surprised.But there again, it's more of us flagging the economics for the founder to consider, for there to be a discussion between the brand and the distributor to really align on that so that there are no surprises.You know, we've been very cognizant about what we do on the distribution trade side versus retailer support side.I'd say in the 13 years that we've been in business, we have done two OIs with distribution, and I regret both of them.And yeah, I mean, your reaction is what I get from most people.They're like, what?Like, you've not been forced to do more.And I'm like, early on, we just got really good advice from advisors and mentors to like watch out for certain things like that.And this is what can happen if you do these.And so we've just always said no to them and in favor of supporting, you know, promotions directly with retailers, where you know exactly where those dollars are going.And yeah, it's come up in a lot of like contentious conversations with distributors over the years.You know, so we finally said yes to it one year and all of the challenges and issues that I was warned about doing it, all came to fruition doing that LI.And so it was like, okay, well, we tried this and had all the issues that people warned me we were going to have, and so we'll never do it again.And so yeah, I mean, again, I think it's one of those things that a lot of people assume that like, I have to do this is built in the contract, so I'm getting pressured to do this or, you know, I've heard, you know, terms that distributors use and like, oh, you're on the blacklist.Okay, like I'm on some blacklist, like, that's great.I'm concerned with making my retailers happy, ensuring that I'm moving at the retailers and supporting them as much as I can.And again, very different conversations, right, for undercapitalized business versus a well-capitalized business.And so, you know, again, as an undercapitalized business, we just have to be very cognizant of ROI and where every single dollar, you know, leaves and how it's spent and knowing that those dollars that are spent are going directly to impacting velocity at the retailer.And so that's just different decisions that we've had to make over the years about what we can and can't afford to support versus other brands that might be better capitalized and more aggressive with distribution that can do some of these things to help grow distribution and retail a little bit faster.You had me at two OIs, which also makes me think about inventory management and bridge buying.Kara, what do you see there?Yeah, I might have to kick to Kyle on that one.I mean, inventory management, obviously, we want the distributor to do a first in, first out type of practice, but Kyle, maybe you have more to add here.Yeah, I mean, I think that's one of the things I think we realized really early on is that we're going to have to do a good job of helping manage that inventory for distributors.I think we run to the assumption, I think, a lot of times that like, hey, they've got all the data, they've got all the systems to be able to manage that appropriately.And I think as the years went on, we realized like, OK, we're going to have to really be careful about managing our own inventory and ensuring that we, one, we have enough, but two, we don't have too much.And it's always a battle fighting that and giving the number right.And yeah, Bridge Brine is real, right?And so we were warned about that and knew that that was going to be a thing.The same with price changes, it happens during price changes as well.We've seen that be a big point of contention lately with brands wanting to raise price over the past few years as costs have increased and distributors wanting to buy like a year's worth of inventory, have a 12 month shelf life, well, I'm going to get a year's worth of inventory at the low price so I can sell at the high price.Right?Which is fair, right?Again, they're running a business, right?That's completely within their rights and within the realm of what they're doing to be able to do that.But it's something to think about as a brand, right?And as a founder, before you do a price change or before you agree things like, oh, lies, just know what you're getting into.And those are things that we fought over the years, right?Like, you know, because we self-manufacture, right?We'd go back to distributors and say, hey, I understand that you want to buy years of inventory, but like, if you do that, like I'm not going to be able to run production for a certain period of time because I'm supplying you entire years of inventory.So can we work together to kind of come up with something that's maybe a win-win for us and you guys, where we can still, you know, maybe front a little bit of these orders for you all to be able to take advantage of the price difference, but not put us in a weird situation where we can't produce for a time because we've oversupplied you all.And so it's a lot of it at the end of the day can be fixed just by having kind of a real conversation because they're people too, right?They're humans too and yes, they're running a business and they're going to want to do as best for their business at the end of the day.Like you're all people, right?And so just getting together and having that conversation around like, hey, here's how this like truly impacts my business.Like, can we just think about the decision that we're making here and how we can come up with a win-win situation?And most of the time, you know, we'd be able to talk that out through distributors and come up with a solution that's a win for them and a win for us.So, yeah.And there again, it goes back to that basic concept of purchase or replacement.Like, they have to be subject to acceptance in the brand's sole discretion.Obviously, the brand wants to sell product, they want to make money, so the incentive is there.But it gives you the flexibility when you encounter a situation like, you know, a distributor trying to place a too large of an order, you know, it's not the right thing, or, you know, something's going wrong that you can say no, or you can partially fulfill without having any sort of contractual hiccups.That's a great point about pricing.That's certainly something I think we'll continue to see.So great point on that.Next up, payment terms and timing.What's typical?Is it net 15, net 30?Does it just depend on the distributor?Varies widely.We see a lot of, you know, discounts if you pay within, you know, two or five days, but yeah, it can vary between 30, 45, 60.Obviously as a brand, you want it as tight as possible.And is that an area where you can negotiate typically?Absolutely.I mean, there may be distributors who, you know, we can say, okay, we've got 10 years of precedent.We've redlined it 10 years and they've never accepted it once.But you know, the 11th time you try might be the first time they give because the brand that you have is different than the prior one.So as Kyle mentioned, everything is open for negotiation.If something's not going to work with your cash flow plans, you shouldn't be afraid to try for something lower.Yep.That's something that we've always negotiated, always, payment terms.And just, again, trying to get it as low as possible, right?Lower the better, right?The worst they can say is no.But that's definitely something that you have to try and negotiate, yeah.And is there something you can offer from your side when you are negotiating?Are there things that you can offer to do or provide that will make your requests a little bit more acceptable?Yeah, I mean, Kyle might have more insight here, but I think, you know, let's say a distributor is asking for 45 days, you can say 30 with a discount in 10, maybe 2% off or something like that.Try to make it economically attractive for them to get you the money quick, so you can use it quickly.Yeah, similar, yeah, offer a discount on 10, if they pay in 10, if not 30.And yeah, other than that, it's just as simple as like, hey, net 90 just doesn't work for us in our cash flow.And so like we'd love to do business with you, but it'll have to be net 30, and we can give you a discount if it's earlier, but it has to be that.And we found that more times than not, net 30 is just fine.And one standard rule to remember with international relationships, as you start to think about going outside of the countries, it's very, very common to require 50% payment up front before you even ship the product, because that's just a riskier situation.You should try to get some money in hand and also incentivize their behavior, especially when going into foreign markets where there's risk of copycat disappearing and things like that.Very smart.Kara, you referenced this a little bit earlier in our conversation.Certainly, most of the brands out there are looking for an exit.What can you tell us about termination clauses and exit strategy, both when you're signing that contract and then when you're looking to exit some of the things that you see come up?Yeah, I mean, the biggest thing is you never want anybody to have a say in the transaction you're trying to complete.And ideally, they don't even know about it until it's done.So the best structure you can have is what we call a free assignability clause to a successor in interest or a buyer in the context of a sale of substantially all or all of your equity or assets.It seems very boilerplate, but what it really means is that you can sell your business to anybody without their consent and you can give them notice after the fact.By the way, you might have seen in the news, I just sold to XYZ.The second best structure is that they don't have a consent right, but you have to notify them before.Obviously, that's a little tricky because sometimes the buyer is sensitive about confidentiality, especially if they're a public company.So that's a little bit less good.Then the worst possible situation is that the distributor has a consent right on the transaction itself.First of all, it doesn't make any sense.They shouldn't be involved in that decision, but it just creates a shakedown opportunity.A lot of times you'll see these contracts that have this right, and it's not even that the distributor is thinking about it.It's just an old boilerplate term, that the idea that if you shake hands with Kyle, and then one day Kyle sells the business to someone else, you should have a consent right over that.That's the historic place from which it's coming in contract law.But in CPG and in the way that brands move from becoming independent to becoming owned by someone else, it doesn't make any sense, but you'll still see it in the back of the agreement.You just need to make sure that it doesn't trip you up.That's a great example of one of those things that I would never even thought to have asked or looked for starting out as a no-stage batter.Again, a lot of it's just you don't know what you don't know, and it's important to really read through these things and look at them and say, what is this thing that's trapped in here that I'm not sure about?Just ask because there's likely somebody or someone who's been there and done that and knows what that means.Well, we have gotten through a great checklist of things that folks out there should know about.Thank you so much for all of your advice and your information.In closing, I'd like to ask each of you, what's one thing that you think brands out there should know about distributor contracts?Kara, let's start with you.The one thing you should know is that everything is up for negotiation, and hopefully, Kyle, I'm not stealing your answer, but it truly is.You have to think about it from the lens of your business, and your goals, and your needs, and expectations, and then, again, most importantly, the future.How does it interact with what you plan to do, and just make sure you understand how those components work together.Yeah, I think a big one would just be, I think I've said it a few times, is just try to know what you don't know, and try to figure those things out, because distribution can have its own language, it's got its own lingo, all of the deductions and chargebacks have their own name, and all these things have their own definition.So this can be a brand new world for a lot of founders that just don't come from this world and aren't in this space, and so I think it's just really important that if you're reading through one of these contracts and there's a lot of things, you're like, I don't understand this at all.Find someone like Kara, right?Reach out to someone that has read them, is familiar with them, whether it be a law firm or just another founder or a mentor and advisor in the space.Find someone that you can go to kind of help say, hey, can you help me understand what some of the stuff means or what helped me figure out what I don't know or what it should be asking before you start just signing your name on a bunch of stuff and then dealing with it later.So, yeah.Great information.Kyle Koehler of Wildway Foods, Kara Posner, partner at Giannuzzi Lewendon.Thank you both so much for chatting about this topic.I appreciate you so much.For everybody else, we hope that you've enjoyed the conversation and definitely head over to nombase.com to find an episode of all of our other podcasts.Thank you so much for joining us and we'll see you next time.That concludes another episode of the Nombase Podcast.Many thanks to Nate Brescia, our recording engineer, Ryan Galang, our live stream coordinator, and Josh Pratt, our podcast editor.If you enjoyed the show, please leave us a review and follow us on your listening platform of choice.Want to be part of a live recording?Register at nombase.com/podcast to join the conversation.You can also watch and listen to past episodes on nombase.com and don't forget to join our Nombase Slack at slack.bevnet.com for company updates, industry networking and community discussions.See you next time.
