Vetting Potential Distributors

Steps to ensure you are making the best possible choice.

Once you identify potential business partner and are ready to move to the contract negotiation stage, there are number of due diligence housekeeping things you will need to do.  First and foremost is to obtain a general overview of your target company’s financial health.  In the west most companies would look to Dunn and Bradstreet or other such ratings agencies, but in Japan the equivalent is the venerable Teikoku Data Bank.

Sample report; https://www.tdb-en.jp/services/ccr.html

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 In addition to a credit score of course, these reports can go into tremendous detail including sales turnover, profit levels, number of full time and contract employees, lists of main shareholders, customers and suppliers, assets and liabilities and even the name, address and university of the key senior managers.  They cost something of course, and can get into the thousands of dollars for the more detailed reports, but if they raise red flags around solvency or other problems they will have been well worth the cost.

Assuming there are no red flags in the Teikoku Data Bank reports, you should next try to find a way to gather answers to the following questions during the initial negotiating phase of the distributor identification process.  Depending on the attitude and level of foreign business experience of your potential partner, you may be able to ask in a fairly forthright manner.  Alternately, you may have to be a bit more diplomatic and indirect in your inquiries. 

1.        What is their track record in your target industry in Japan?  This is an obvious question, but many companies will present very small successes in certain markets as being more significant than they actually are.  Try to find out what percentage of their sales are made up of sales to your target market. 

2.        What is their prime objective behind their interest in your products/services?  If they are not clear about this, they may be trying to contain or supress your products in the market and not promote them.  This is more common than you might think.

3.        Closely related to (2) above, do they currently sell any products that you consider competitive with your own? 

4.        What is their vision and strategy for their own growth and how do your products or services fit into that strategy?   How large do they think revenues could be for your product over a certain timeline, typically 1, 3, 5 and 10 years?

5.        How would they define success in the relationship at those same key milestones. One year, 3, 5 and 10?

6.        What would they consider to be an acceptable profit margin on your products/services?  

Once you have some basic alignment of intent, vision, time horizon and profit expectations, the next discussions will need to be focussed more on the actual nuts and bolts.  Try to work out the division of responsibilities in the relationship in as much detail as possible prior to signing an agreement.   How will responsibilities for QC, certification, NPD (New Product Development), marketing and promotion, dealer relations, logistics, claim resolution and every other aspect of the sales channel be allocated?  With prior agreement on these points the distributor contract can be more detailed, with clearly defined expectations.  Too often small and mid-sized foreign companies are so excited to simply have found an apparently eager partner that they avoid these challenging discussions for fear of causing the Japanese party to walk away.  If they cannot at least make a decent attempt to clarify these responsibilities, then maybe you should be the one walking away.