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WHEN TO SIGN ON THE DOTTED LINE Weighing the pros and cons of entering formal distribution agreements. BY ANDREW KAPLAN

For a craft distillery, working with a distributor can be the best of times, especially as the partnership between the two companies grows a young, nascent brand. Unfortunately, it can also be the worst of times if a challenge or disagreement erupts between the two parties and the relationship hits a bumpy road. Distribution contracts can help prevent that from happening—and also reduce the legal, financial and emotional pain if the partnership sours. But in the complicated landscape that is today’s alcohol industry, is a formal, written contract always necessary? Or will a simple handshake or verbal agreement suffice? In fact, is any contract necessary at all? The answers, according to experts, depend on the situation. Things like location (for example, are the parties doing business in a franchise state or an open one?) and the size of the distributor, can make a difference. “The smaller distributors are less likely to have written contracts,” says Kate Palmer, owner of Hearts + Tales Beverage Co., a craft brand incubator operating in top markets across the U.S. “With the small wholesaler I worked for in California, I believe it was all handshakes. I never saw a single contract. Granted, California is an open state.” But, she is quick to add that written formal contracts are commonplace with the larger wholesalers, especially given the current competitive climate when it comes to signing with the many small brands today. “Even though it’s a small brand,” says Palmer, “these larger wholesalers think about, ‘Well, am I going to just lose this brand in a couple of years if they get purchased?’ Distributors, even the big ones, don’t like losing brands before the end of their lifespan, even if it doesn’t end up being the next big thing. They still like to hang on to stuff, just in case it pops. “The fact of the matter is, neither brands

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or wholesalers can predict the future and its drinking trends. Contracts should exist, but for craft producers they can be short term. Honesty, due diligence and consistent communication throughout the course of the partnership is stronger than that piece of paper and is more likely to lead to mutual success.” Scott Harris, general manager of Catoctin Creek Distilling Co. in Purcellville, Virginia, wholeheartedly agrees with that latter point. He prefers handshake agreements with his distributor partners. While he has signed contracts with half of his distributors, he says those were only done at the insistence of the distributors. “The best situation, for both sides, I think, is a verbal contract,” he says. “My best distributors are oral agreement distributors.” And yet, attorneys who specialize in distribution agreements in the alcohol business point out that putting things down in writing can have its advantages for a craft distiller. Tracy Jong, an attorney based in Rochester, New York, is realistic about the power of written contracts in this industry. “There are companies that are going to agree to anything in writing, but they are going to do what they’re going to do,” she says. “They don’t really care what the contract says.” But, she is quick to add, that doesn’t mean a written contract should be dismissed altogether. “Unfortunately, business requires a little bit of both,” she explains. “Some people are going to abide by a contract and some aren’t. We have to use our best practices for both circumstances. Because honestly, we just don’t know what we’re getting into.” And Ryan Malkin, an attorney based in Miami Beach, Florida (and counsel to the American Craft Spirits Association), says often the correct decision comes down to each distiller’s situation. “If you’re in a state where there’s no franchise law and you don’t have any contract, then you can leave whenever you want to,” he

explains. “So, if I’m a small brand and I’m in an open state, let’s say California or New York, then I would prefer not to have a contract at all until I’m at such a size where the distributor’s going to give me some of the things they would give to the Diageos of the world.” At the same time, in franchise states, which make it harder for a craft distiller to leave a distributor, it can be the written contract only that offers specific escape clauses to do so. The size of the distributor also can end up influencing the decision based on whom a contract favors. A craft distiller may be more inclined to want a formal contract with a small distributor that may be just starting out, for example, than with a large, established national one. What to Include in a Contract For those companies entering into a written agreement, experts suggest trying to include certain terms covering circumstances unique to a craft distiller. These can include specific payment terms more agreeable to a young operation, agreed-upon performance thresholds, and sometimes funds allocated to marketing programs. Malkin suggests payment terms should be one of the priorities for a craft spirits company. He explains that negotiating the number of days can be critical for a young distillery just starting out. “A lot of times the major distributors would say perhaps 90-day payment terms or even 60-day payment terms,” he says. “For a craft distiller, 30 or even 45 days is hugely important because they may not have the cash flow of a supplier like a Diageo or a Campari.” A trigger to allow the craft distiller to get out of the arrangement is also very important. “Regardless of whether or not you’re in an open state or a franchise state, the agreement tends to tie you two together, regardless of


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Craft Spirits Magazine October 2019  

A publication of the American Craft Spirits Association, Craft Spirits Magazine explores the art, science and business of distilling.

Craft Spirits Magazine October 2019  

A publication of the American Craft Spirits Association, Craft Spirits Magazine explores the art, science and business of distilling.