When to Walk Away from an Agent or Distributor (Part IV of IV)

away4An effective due diligence screening program should include instances when a company decides not to engage an agent or distributor. It is hard to persuade the business side of this fact but success does not necessarily flow from blind acceptance of every potential third-party.

We are all focused on success and approval of business partners. However, there are situations where a third-party is just not worth the risk. The earlier in the process these potential partners are identified, the better for everyone involved.

Warren Buffet has stated that he only does business with people he likes. That same maxim should apply with agents and distributors. If you cannot get along with the agent or distributor, the question becomes whether you can do business with the party and whether you want to do business with the party.

I have worked with companies where the initial discussions and explanation of the due diligence process to the third-party leads to miscommunications and confusion. This can result in some significant obstacles – a third-party unwilling to comply with basic information requests or documentation can be a difficult obstacle to overcome.

Assuming that communications are clear and expectations are outlined, one of the most significant red flags is a third-party unwilling to cooperate with the process. For example, a potential third-party that will not answer questions in a questionnaire or provides only limited information about the third-party is likely to make the due diligence process difficult, if not impossible, to complete.away3

Another significant red flag that is difficult to resolve is instances when a third-party misrepresents or omits significant facts during the due diligence process. Sometimes it takes a boots-on-the-ground investigation to reveal these misrepresentations. In every case, it is important to confront the third-party and give them a chance to explain the misrepresentation or omission.

In the end, credibility during the process is critical. There are times when credibility concerns can lead to a decision to close the due diligence process.

From a substantive standpoint, I am not going to address some of the standard situations that arise – a referral from a foreign official, a third-party with significant foreign government affiliation, a third-party with no qualifications or experience in the business, or a third-party with unusual payment demands (e.g. amount or manner of payment). These are fairly standard situations that come up and these (either isolated or in combination) can lead to a decision not to engage the third-party.

Prior instances of prosecution or investigation for civil and/or criminal violations of local law can raise serious obstacles depending on the nature of the allegations, the circumstances surrounding the investigation, and the political climate surrounding the investigation. Prior investigations are not limited to objective factual inquiries (e.g. Governor Perry and the recently-initiated Texas prosecution). An objective review of these situations is required and should be addressed directly with the potential third-party.

away2Similarly, adverse media reports of corruption allegations can be reliable or unreliable, and must be assessed with a grain of salt. A press report in Venezuela against political opponents is far less credible than an investigative report based on source data from The New York Times. Adverse media has a sliding scale of reliability and relevance. Again, these issues should be directly addressed to the third-party.

It is hard to rely on or even document issues that are resolved through credibility determinations or gut checks as to specific circumstances. However they are resolved, they must be documented and carefully reviewed through the company’s internal due diligence process.

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