Chapter Five: Locating your clients
After you have signed the formal contract, you need to locate people to assign your rights to, who will sell the products in the market. There is always the option of importing the goods yourself and distributing them, but if you ask me, it’s more trouble than it’s worth. Why should I invest my own money and spend precious time distributing the items, when the alternative is to locate someone to do all this work for me, and even have them pay me in return!
Now you know why it is an advantage to handle goods that are connected to a business that you are knowledgeable about. If you don’t have any idea about the product field, you will need to search through the Yellow Pages, trade directories and journals to trace the ideal company. Once you find them, and tell them about your product, a typical reaction to expect is “How would you know what might do well in this particular industry?” If your answer is likely to be “Umm, because I seem to think so”, you will definitely be on the back foot in dealing with the company.
However, if you answer, “I have worked practically my whole life in this industry and am quite thrilled with the possibilities of this particular product, because it is far superior to the one that is currently being used, etc”, then you will have established that you do know what you’re speaking about, which will inevitably make them trust your take on the subject. (There are those who will act as if they don’t, but that is simply a normal strategy to gain the upper hand in negotiations).
Another benefit of handling items from a knowledgeable field is that you are likely to be aware who the best people in the business are and you can start directly with them, rather than spending time searching the right company. You must go with the best people as the preferred outcome is to assign all your rights in the goods to a single entity, instead of dealing with various organisations who handle separate segments of the market. You could break it up and give the UK rights to one entity, the Italian rights to some other company and so forth. Except, why would you not make the effort to locate a single company (if possible) and avoid all this extra work and cost?
And it’s not simply the added work of the initial deal. You will need to organise all the payments that you get every three months, and also stay abreast of how your customers are doing. So, why do all this many times over when you can do it just once? By breaking up your territory, there is an added peril that you could miss out on some important regions, thus having a hole in your coverage. Your supplier can then take back the rights of those particular areas. Why take that chance? So, it’s much better to assign all your rights to a single company and be free from such headache.
One more goal of finding the best company is that you can ensure that you have a presence in the entire market. For instance, suppose you have the sole rights to a novel type of plastic consumer bags. You could approach the people who purchase plastic carrier bags for a particular chain of stores and offer them your rights. They would jump at the thought of being one up on their competition by giving the novel bag to their patrons. However, by doing so, you could be limiting your earnings. After all, how many plastic carrier bags can any one chain of stores use?
But, if you approach the big fish – the people who supply plastic bags to all the big chains of stores, then you could literally enjoy sales of billions of bags, instead of a few million. Just imagine the profits that this could entail???
Here, I must say that I always attempt to locate companies which absolutely love my merchandise. If anyone is even slightly hesitant and need to be cajoled into trying my products, they probably won’t do full justice to the goods and no one would profit from the arrangement. An excited client will also be someone you can bargain better with about the royalty, and will not even hesitate to provide the details of their corporation, which you will require to give to your manufacturers to convince them that they are the ideal company to sell their products.
Chapter Six: Closing the negotiations
Your product is a hit. Your customer is persuaded. They even wish to obtain all rights for the goods. All that remains is to hash out the financial aspects and sign a formal deal.
It’s not easy to offer precise opinions regarding what earnings to expect from a particular item. This will depend on the item as well as your negotiating powers, which is why it will differ a lot. If the item is likely to be for the masses and will sell easily, you could bargain for a bigger cut. But, if the product may be difficult to sell, you could persuade the client to handle the item by asking for a smaller royalty. In such circumstances, you could even end up receiving larger commissions from your manufacturer.
Yes, that’s the beauty. Both the parties – your manufacturer and your distributor, will pay you. You receive a royalty from your distributor as you are offering him sole rights for the item, without any competitors. In addition to which, you receive a commission from the manufacturer on all the items that are sold in your region.
This may cause you to question why the manufacturer would go for such a deal. Since he already has a contract with you, wherein you will purchase the items at their regular cost, why would he give you a commission on whatever he gets from your distributor, when the distributor too is paying the regular cost. Well, to answer you in a single word – quantity. You tell your manufacturer this, “If you let me allocate my rights to another party, you will sell a lot more items than I could possibly manage myself. For which you pay me the commission.” They simply will not say no as you already have a signed contract, which does not state anything about the least amount of goods that need to be sold. Till such time that you are giving them some orders (regardless of how small), they cannot cancel the contract and take back their rights.
However, they will want some information about who your distributor is going to be. You obviously do not want to disclose that information, pretty much for the same cause why you don’t want to disclose to your distributor who your manufacturer is; because they might just cut the middleman (which is you) right out. Thus, you need to give them some useful information, just not the whole truth.
Do not mention something like, “It is the largest plastic carrier bag producer in the UK” – you might as well just say the name. Instead, you should tell them, “The company has a supply agreement with majority of the big store chains in United Kingdom, and are also establishing a sales team of XXX number of people for their European expansion plans.” The term ‘Supply agreement’ is truthful enough but also adequately unclear, as it indicates items ranging from bags, to sanitary ware, to cleaning supplies, to kitchen ware etc, which means you could be referring to any number of companies. After they decide to let you pass the contract onto another, you get ‘the licence’ (the third contract) signed by them, but still do not disclose who your distributor is on the agreement.
You might have to undergo some degree of running back and forth between your manufacturer and distributor before you get the desired rate of royalty and commissions. I usually try to get about 5% to 10% of all sales, which typically winds up being evenly distributed between the supplier and my customer.
I really do favour that the supplier will propose what percentage they will pay me in commissions; at the very least I inquire what rate they would most be at ease with. It is simply not possible for me to study their account books, so I prefer not to force them into a situation where they need to ‘tamper’ with their books. Some manufacturers believe that they can recover this commission by charging a higher price for their products. However, I always recommend that they not do so. Why give clients cause to look around for another product?
The arrangement with the manufacturers is quite clear-cut. You wish to be paid a percentage commission on their proceeds from the distributor; nothing more, nothing less. The arrangement with the distributor however can be worked out in various ways, which gives you added negotiating powers. Keep in mind the main rule for negotiations – you need to settle more than just the price aspect, the structure of the arrangement has to be worked out too.
The next rule of bargaining is that the deal should be mutually beneficial or it will fizzle out quickly. However, it is human nature to do dumb things. People become selfish and upset the deal as they desire more than what is practical, or sometimes get a superiority complex and behave like they just have to show that they are smarter than the other party. However, all things said and done, the only evidence of your smartness is the money in your bank. And that hinges on the satisfaction of your customer with the arrangement so that they stick by you instead of finding someone else to do business with.
Your dealing can be done through written correspondence (faxes and letters) but that can take a considerable length of time. And although phone dialogues are quicker, I somehow am not quite at ease trying to negotiate an important deal without being able to see the other party. Thus, I always attempt to do my entire deal making in person. Being face to face with them gives me a chance to gauge their reaction to any of my proposals, and I can even determine when their counter offers are genuine and when they are just testing me out.
All your people-reading ability needs to be used while finalising the deal; an essential facet of which is body language. Since I am not writing this to teach you about body language, I will not go into details here. But I will tell you that it is vital to observe their stance: is it defensive and suspicious, with either the legs or the arms crossed, and are they facing away from you or leaning backwards. Or, is their stance open and calm, with their hands by their side or on the desk, and leaning towards you as if interested in knowing what you are proposing.
When the other party exhibits the defensive stance, I pull away from them, take my papers away from them and try to give them some space, which actually appears to help. With those who seem comfortable, I lean towards them and push my papers closer to them, all the time keeping my eyes on theirs. They believe that rug dealers out in the Middle East keep seeing their clients’ eyes at all times, biding time till they see their pupils widen, which indicates that they have come upon a rug that they absolutely love.
I too keep an eye on the faces of people whom I am negotiating with, when we are just talking pleasantries. Majority of the people shift their heads or faces in a particular direction when they are agreeing about something, or when they see something that they like. Whereas, if they are disagreeable about something, or when talking about something that they don’t particularly care for, they move their faces and heads in the other direction. A ‘Yes’ is usually accompanied with a slight nod or even a half curl of the lips; whereas a ‘No’ usually comes with a tiny shake of the head or a small grimace. Thus, I usually ask sociable questions to which they will answer yes or no. And when they do, I keenly study their body language and the subtle signals that they give off.
Another thing that I look out for is any indication that they are lying. I never believed that people actually raise their hand to their faces (mouth, nose etc) when they aren’t being honest, but that is the truth. Some people might even give an edgy little cough (no, I’m not kidding!). And yes, at times you will even come across a tough guy who has ‘poker face’ down to an art. But, by and large, I notice that peoples’ body language and facial expressions are quite easy to interpret. By the way, I’d like to offer you a small piece of advice: if a few years after your initial few contracts, you recognize that you may have mis-interpreted the signals which may have landed you a superior deal, don’t stress over that. We’ve all been there, and you need to treat it as something that just happens, and should simply think of it as valuable experience. You definitely should not grumble about it to your clients, or even bring the topic up should you get the chance to negotiate another deal. If you do, they might think that you are attempting to cover your previous losses and laying down unreasonable terms for the new deal, even though you might not be doing anything of the sort.
The structure of the arrangement:
You can shape up your arrangement in various ways, depending on whether you want a one time payment, or repeated royalties, or both. Your choices are:
- A one time payment without any ongoing royalties, and infinite rights.
- A one time payment that applies to a predetermined period, after which you get back your rights.
- A lump sum payment followed by royalties for a specified period; at the end of which the deal can be carried forward as is or re-negotiated.
- A lump sum payment as well as royalties for ever.
- No one time payment but ongoing royalty for ever.
- No one time payment, royalty for a limited period, at the end of which you get back your rights. Even though you will not get a lump sum up front, I still attempt to get at least some up front payment so that my legal cost and charges will be taken care of.
However, I usually attempt to get them to pay me a lump sum, particularly if the goods are such that could enjoy an initial run and then fade out. But it may not always be possible for your distributor to part with considerable amount of money right at the start. You simply have to gauge their circumstances from their body language and facial signals and bargain till you reach a deal that makes both of you happy. Just so I do receive an up front payment, I generally agree to a lesser royalty, and that may just be the deciding aspect if they believe that the goods will sell for a long time to come.
After we have reached a mutually satisfying arrangement, we go ahead with the signing of the contracts. If there is enough time, I dispatch bare copies of all three contracts to them prior to our meeting so they have time to study the papers. I’ve just told you about the chief contract, and in the next chapter, I’ll take you through the others. (Copies of all are available in the Appendices.)
Here’s a summary of your plan of action:
- Let your manufacturer know that you have located someone to pass your rights onto, but DON’T give the name.
- Settle on a percentage for your commission with the manufacturer.
- Touch up on your people reading talents and negotiating powers.
- Prior to meeting to settle the deal, think about all the various ways you can shape the arrangement.