Beer and Distributors, beer and distributors
They go together like a horse and carriage
This I tell you, brother
You can’t have one without the other

Selecting a Distributor and selecting a spouse have a surprising number of similarities. It can be difficult to find the perfect fit. The relationship will have its ups and downs. And, most importantly, it can be expensive to end the relationship if it is not working out.
If you decide that it’s time to tie the knot, here are few key points to consider before you sign the “Prenuptial Agreement” (a/k/a the Distribution Agreement).

What to Consider Before Signing a Beer Distribution Agreement

1. Know your state’s distribution laws. These laws will override the contract terms so it is important that you know what rights you and your distributor have under the state law.

2. Define your territory carefully and specifically. We recommend that you add the following language to the Territory definition of your Distribution Agreement so that you do not end up in situation where you are required to purchase your own beer back from your distributor to sell it it:

The following is excluded from the Territory definition: any physical location of a restaurant, brewery, brewpub or taproom (or similar establishment) owned by Brewery or its affiliate(s)

3. Be specific in the products that will be distributed. Be sure to exclude tap room only releases and beers that are brewed for certain markets (think Colorado Native by Coors-only available in Colorado). Make sure to carve out contract brewed beers and collaboration beers or you may inadvertently be unable to provide contract brewing services or work with other breweries on collaboration beers. We recommend that you add the following language to the Product definition of your Distribution Agreement:

Products shall not include any fermented malt beverage that: (1) is made under a contract brewing agreement for a third party which may be produced by Brewery for sale or distribution under third party brands not associated with Brewery or an affiliate of Brewery; or (2) is designated as a tap-room only (or similar language) release; (3) is a collaboration beer brewed at another brewery and not intend to be distributed by Brewery or (4) is designated for release exclusively outside the Territory.

4. Specify who is financially responsible for out-of-code products. Is the distributor responsible? Do you split the costs? While ideally this would be the distributor’s cost, you have to balance having old product in the marketplace against the disposal expense.

5. Specify who is financially responsible for the marketing the products in the territory. Does the distributor have to purchase tap handles? Do you split the marketing expenses up to a certain amount?

6. Distribution Agreements typically have a net 30 payment terms. As you will have incurred the costs for the products long before the net 30, make sure to include a late fee and interest to encourage your distributor to pay on time. Here is a sample provision:

Distributor will pay Brewery a late fee the lesser of the daily equivalent of: (i) eighteen percent (18%) per year simple interest; or (ii) the highest amount allowed under law, on any overdue amount for each day any amount is past due calculated from the date of the original delivery of the Products and accruing until the past-due amount is paid in full. This provision does not permit or excuse late payments.

7. What’s worse than not being paid on time by your distributor? Having to provide more products while you are not being paid. Be sure to include a provision that allows you to suspend the delivery of products to the distributor if the distributor has a past due balance. Here is a sample provision:

Brewery shall have the right, at its option, to suspend delivery of Products during any time period Distributor is past due on amounts owed to Brewery, effective upon receipt of notice by Distributor.

8. If the Distribution Agreement contains a termination fee to end the distributor relationship, try to specify the exact formula (unless your state law requires “Fair Market Value”). This will let you know if you can afford to end the relationship and will help you in courting new distributors. Formulas typically range from 3 to 5 times the previous year’s gross margin. Avoid having “greater of” provisions which specify a multiple and the fair market value. If the Distribution Agreement has a fair market value clause, this by definition is the fair market value. The “greater of” provision may put you in a situation will you will have to pay more to terminate the Distribution Agreement than is “fair.” Here is a sample provision:

Brewery shall pay to Distributor on the 30th day after the notice a sum equal to three (3) times the gross margin earned by the Distributor from the sale of the Products in the 12 months preceding the month in which the notice is given.

Distribution Agreements, like marriages, typically do not have end dates. Also like marriages, they typically end (at an expense) when one party is unhappy with the other or if someone better comes along. Do your research before making this potential lifelong commitment.