Questions

I've been approached by a Canadian distributor about my product. How do I negotiate a contract?

The product is moving from prototype to initial product run. The prototype debuted at NY Toy Fair, the feedback has been positive and interest overwhelming.

4answers

I have related relevant experience in this area as I am the first American to be invited to have an Entrepreneur's Visa in Canada, and I am also an Attorney from Boston, MA.

My experience in Canada has shown me that for Americans, it is very much similar to the United States, and as we are State-based in our choice of laws conflict provisions within the contract, Canada is Province- based. So first, understand what Province in Canada this company is from.

Otherwise, the terms and conditions of the contractual negotiations are very similar to the U.S., so your relevant knowledge of your product, its margins, the anticipated percentages of net and gross margins and whether the respective market can withstand and or absorb that pricing, whether the distributor takes title or receives a commission while you retain tile, etc., are all normal, fundamental contractual terms and conditions which must be addressed and agreed upon before any product can be shipped.

This, of course, implicates Canadian Customs, therefore is is important to know your NAFTA and or NAICS code of your product to understand the nature of the duty, if any - this is more of the Canadian's issue, but its good business practice for you to know, as this may impact the final selling price which the Canadian company has to sell at, and you want them to be successful, of course.

Further, as you are in the prototype stage, you should have a solid NDA (Non-Disclosure Agreement) signed by the Canada company before divulging any information to them, other than the most basic and rudimentary. To craft the terms of that agreement effectively, you need to know what your information and intellectual property is comprised of, so you understand what it is that you are actually protecting (patents, trademarks, service marks, copyright, know-how, or trade secret).

This was merely a quick outline, as I see it, regarding your question. Should you desire a more in depth explanation, please reach out to me on my mobile at 617-283-6995, I am based in Boston, MA and travel regularly. You may text first to establish a suitable time for us both to chat, should you so desire. Thank you for posting your question, and allowing me to answer. My Best, Joseph J. Shamon, Jr. - 617-283-6995,


Answered 3 years ago

Congratulations on developing a toy product that seems to have the interest of prospective customers! Based on this initial brief query, I have some preliminary comments and suggestions:
1) How you deal with domestic and international distributors should be part of an overall distribution strategy. Talk to other toy manufacturers and ask them about their distribution strategies. Study the distribution tactics from companies that are marketing similar products (by seeing which distributors carry their products). Consider some alternatives such as: Should you engage as many distributors as possible, or would it be better to have a limited number of distributors that have better terms and reach different segments of the market?
2) At this early stage of initial production during which you may have limited quantities available, you’ll want to leverage those early units by establishing relationships with key distributors that will eventually place large orders if successful. It will help you ramp-up production.
3) As you grow, consider if there are benefits to engaging domestic distributors first and then expanding to international distributors (including Canada).
4) Keep in mind that given that you’re just starting the initial production run, your initial costs may be high (due to small initial volumes) and you may not have a solid handle on all your costs (e.g. landed costs, duties, order fulfillment costs, if any).
5) Despite the above, you never want to lose a prospective distributor. If the Canadian company fits your initial distribution strategy, you’ll want to begin discussions with them about quantities and target timing for receipt of goods. You should be prepared to provide ballpark distribution prices (realizing there may be additional costs involved for international sales). If they have a serious interest, ask them to send you a Request for Proposal or Request for Quotation detailing the items and quantities they desire and any terms they require (including desire to return items that aren’t sold). This will allow you to accept the terms and provide a price based on those terms or propose alternative terms and prices for the new terms.

I'd be happy to elaborate further if desired.


Answered 3 years ago

Hi, My expertise is in consumer products across developed and emerging markets, mostly with global brands.
If you don't already have a clear pricing and sales strategy for your product, then you need to create one. This becomes even more important if your product is likely to sell in a number of countries around the globe. And based on the response you have it could be large volumes too.
You need to make sure there is broad price alignment across geographies, i.e. any particular market does not have too low or too high a potential price. Exchange rates play an interesting part here. This is normally done by mapping consumer price across major markets and retailers, estimating retailer & distributor margins local taxes and freight costs. This will also help you understand and manage varying profitability across markets.
Some things to consider when negotiating with the Canadian distributor.
- What the end consumer price will be in Canada vs USA?
- What margins to retailers expect for a new product in Canada (will vary by brand strength)? This data will also help you understand the potential profit this distributor will make.
- Inventory holding levels (in weeks of stock). This will give you an idea of distributors working capital investment in your product.
- Payment terms, days to pay you etc.
- Product sales forecast: how far out ? 6 months 1 year ? What duration of the forecast is fixed ? 1 month, 3 months etc.
- Product Warranty - who covers damaged or faulty products? and how?
- Product launch marketing investment. Who bears the cost initially and how much? What will be the ongoing marketing support and who will fund? Distributor or you?
There are a number such decisions to align on.
I wish you all the best with the product and in case you need further guidance or counsel, do get in touch.


Answered 3 years ago

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