Although mergers and acquisitions are common methods to scale a business, these strategies may require substantial amounts of cash and/or a flexible capital structure. When there is a lack thereof, employing an alternative method of growth may be a suitable alternative. Below is a summary of some common agreements to facilitate growth which are available to both small and large businesses.
1. Sales agency agreements
This type of agreement is usually between a business and an agent. The agent agrees to be a representative of the business, never donning the risk of a particular transaction. The agreement may be customized to be exclusive, include non-competition or non-solicitation clauses, etc. Most importantly, the products or services sold by the agent must be clearly specified in the agreement.
This agreement is typically suitable where the business is involved in a large number of sales transactions, requiring extensive negotiation of prices and terms. The downside of this agreement is that the business will continue to bear a majority of the risk when utilizing this expansion strategy.
2. Distribution agreements
This type of agreement is between a distributor of goods and a supplier or a manufacturer of such goods. The distributor will agree to sell the goods on behalf of the supplier or manufacturer as principal. The distributor will take title to the goods and assume the risk of resale. As a result, this agreement allows a small company to extend its distribution channels, while taking on minimal additional risk. As in the case above, a distribution agreement may be customized to fit the particular circumstance.
This agreement is suitable where the business has limited resources available to absorb the risk of an extensive distribution channel, but wishes to gain from the upside of increased exposure.
3. Licence agreements
A licence agreement is between a two parties, namely the licensor and the licensee. Typically, the licensor will grant the licensee the right to use its intellectual property in exchange for a royalty or some other payment. A licence agreement can take many forms. It may deal with trademarks, patented technology, copyright or other forms of intellectual property (including non-registered intellectual property).
These agreements provide for a more diversified revenue base, tapping greater value from profit-producing assets. However, a small business must take care in licensing vulnerable or inadequately safeguarded intellectual property in order to protect such assets, which can be large revenue drivers. For example, there are dangers around licensing trademarks in Canada. The licensor needs to control the quality and character of wares or services of the licensee.
The author would like to thank Lauren Day, articling student, for her assistance in preparing this legal update.
Norton Rose Fulbright Canada LLP
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