Dealership Agreements – 13 Prenuptial Considerations

Question:   I’m considering becoming a dealer for an equipment manufacturer, and I’m not sure what to ask for in the Dealer Agreement or how the relationship is going to work out. I’m concerned that the agreement might obligate me for something unexpected and/or unaffordable. Can you provide a list of issues to look out for?

Answers:

Certainly.  As you know, Dealership Agreements take many forms, may incorporate a range of franchise concepts, and can range in length from a few pages to more than 50.  Why are many so long?  In short, a dealership is, in many ways, like a partnership.  Among other things, the parties need to decide who runs things, how they will be run, who will pay for what, and what happens if the relationship expires or terminates.  Addressing each of these issues properly requires consideration of a host of sub-issues, such as:

  • Operations:   How many machines must be purchased in a given year?  What levels of parts and supplies will be required?  How much will they cost?  Will the dealer be entitled to any discounts? What warranty support will be required of each party? What types of, and how many facilities will a dealer be authorized or required to operate, and where? Will the dealer be entitled to exclusively sell in a given territory?  What happens if another dealer or the manufacturer sells within that territory (for example, would a commission be due to the dealer)?  What happens if all or a portion of the dealer’s equity or voting control is transferred? Will any special financing be provided by the manufacturer?  What other operational requirements will be shouldered by the dealer (e.g., records retention, insurance, financials, signs, promotional materials, advertising, marketing, staffing, etc.).  And critically, how long will the Dealership Agreement last?
  • Who Pays for What:  In most cases, the dealer is going to have to agree to pay specified prices for products purchased from the manufacturer.  And perhaps more importantly, the Dealership Agreement will likely include a provision requiring the dealer to purchase such products (machinery, parts and supplies) only from the manufacturer, and not from other dealers or third parties.
  • Expiration and Termination:  Agreeing on how and when a Dealership Agreement expires and/or can be terminated (e.g., for “cause” or “at either party’s discretion”), and what happens then can be the most important of all issues to be addressed, particularly with respect to “repurchase” obligations (obligations of manufacturers to buy back from dealers any equipment, parts, supplies, specialized tools, signage and/or other items that remain unsold upon expiration or termination). 
  • State Laws:  Unlike franchise statutes (which may also apply to dealership arrangements), state dealer laws tend to be product- and/or industry-specific.  All that is generally required is the existence of a contract between a supplier and an equipment dealer that sets forth the rights and obligations of each party pertaining to purchases and sales of equipment. Other “franchise” concepts, such as trademark licensing, marketing plans, franchise fees, etc., tend to be largely ignored.  This creates some flexibility, but can also result in confusion regarding whether a state statute applies to a given type of dealership at all.  For example, Arizona’s broadly named “Equipment Dealers” law actually applies only to dealers of “machines designated for or adapted and used for agriculture, livestock, grazing, light industrial and utility purposes,” and specifically excludes earthmoving, heavy construction, mining and forestry equipment. 

More importantly, state dealer laws can vary dramatically in terms of what they actually require of/for dealerships they do govern.  For example, some prohibit non-renewals, terminations and/or substantial changes by the manufacturer in the absence of “good cause,” while others may require extended notice periods for terminations and/or non-renewals.  

Most dealer statutes require manufacturers to repurchase all or some portion(s) of a dealer’s inventory, parts, specialized tooling, computer hardware, software and/or other items, but they may do so at widely varying levels and/or prices, particularly with respect to imperfect or partially used equipment and/or parts. It can therefore be crucial to know which state laws best serve your interests and, in some cases, to include a contract agreeing to apply the most favorable of such laws – with the understanding, however, that many states make a practice of simply applying the law of the state in which the dealership is physically located, regardless of what the Dealership Agreement might prescribe.  

  • A Note on Repurchase Obligations:  This issue merits separate discussion, as it can be the most important single negotiating point. Repurchase obligations vary dramatically from agreement to agreement and from state to state.  Many Dealership Agreements either ignore them or include language to the effect that: “The Manufacturer has no obligation to repurchase any equipment, parts, materials, supplies or other items from the dealer.”  

As noted above, however, most dealer statutes impose repurchase obligations on manufacturers to one degree or another, regardless of what their Dealership Agreements say, and go on to invalidate contract provisions to the contrary. Some, however, appear at first glance to do so, but then back away from these important requirements in whole or in part.  For example, Pennsylvania’s dealer statute includes the following language at the end of a lengthy repurchase obligation:

 “In the event a dealer terminates a dealer agreement, the obligation of the supplier to repurchase equipment, repair parts and specialized repair tools shall be governed by the terms and conditions then in effect in the dealer agreement between the supplier and the dealer and not by the provisions of this act.” [Emphasis Added].  13 Pa.C.S.A. § 205-3(c)(3).

Thus, if the Pennsylvania Dealership Agreement states the manufacturer has no obligation to repurchase your inventory if and when you terminate the agreement, you may be stuck with equipment you can’t sell, can’t require the manufacturer to repurchase, and/or can’t support.

  • Other Legal Issues:  It’s important to recognize that ALL of these issues are “legal” issues because each of them creates a “legal obligation” to do, or not to do, something. Consequently, the other relevant legal issues have mostly to do with enforcing those obligations – i.e., what happens if one of the parties breaches them. That makes it imperative to include: (a) plainly written, carefully limited, and unambiguous obligations of each party; and (b) a clear and concise statement of the parties’ respective rights and remedies in the event of a breach by the other party – which in most cases, should include notice, termination rights, damages, reimbursement of expenses (including attorneys’ fees), return of confidential information, repurchase obligations of the manufacturer, and perhaps other specific remedies based on the circumstances surrounding the relationship.

Short-List of Considerations:  In light of all this, it’s probably impossible to create a comprehensive list of considerations for prospective dealers that doesn’t go on for several pages.  Nonetheless, several issues tend to be common to these arrangements and usually merit negotiation, including:

  1. Exclusivity:  Right of dealer to sell exclusively within a defined territory, without competition from the manufacturer and/or other dealers;
  2. National Account and Remote Dealer Sales:  If the manufacturer and/or any other dealer(s) is/are to be entitled to sell to “national accounts” or to other customers within your territory, include a requirement that your dealership be paid a commission on such sales;
  3. Provisioning:  Identify a selection and sufficient quantities of desirable equipment and required parts and supplies to be made available by the manufacturer;
  4. Deliveries:  Require reasonable timing of deliveries – no more than [__] days/weeks from date of order;
  5. Purchase Commitment:  Identify the number of machines, and levels of parts, consumables and other item(s) the dealer will be required to purchase and when;
  6. Pricing:   List the prices to be charged by the manufacturer, and for how long;
  7. Price Changes:  Require reasonableness and where possible, include limits, most-favored-nations status (a requirement that the prices you pay must be no higher than the lowest prices paid by any other dealer in the manufacturer’s network), and extended advance notice for any subsequent price changes;
  8. Sale and Payment Terms:  Identify sale and payment terms for items to be purchased from the manufacturer, and require written approval of both parties for changes (or most-favored-nations status as a fallback if the manufacturer insists on flexibility to change payment terms);
  9. Changes to Equipment Designs and/or Specifications:  Negotiate for a right to return and exchange obsolete machines for new designs/specifications. At a minimum, require reasonable levels of parts and consumables support for the lives of all machines (including those discontinued or rendered obsolete by design or specification changes);
  10. Service Requirements:  Identify the level(s) of warranty service, if any, the dealer will be required to provide, and whether that service requirement will extend to equipment sold by the manufacturer and/or other dealers in your territory.  If so, you will also need to know how and when you will be compensated;
  11. Notices:  Require as much advance notice as possible for terminations and non-renewals;
  12. Change of Control:  For sales of the dealer’s business or transfers upon death of the owner, negotiate for automatic approval.  At a minimum, require that the manufacturer’s approval not be unreasonably withheld; and
  13. Buyback Obligations:  Include at least a requirement that unsold equipment and parts, as well as display items and other peripherals (other than items the dealer elects to keep) be repurchased in the quantities, and as and when required under the applicable dealer statute – remembering that your state may not yet have adopted such a requirement.  Note:  Be sure to research state laws that may apply, and if your state doesn’t have a repurchase obligation, include one that requires 100% repurchase upon termination.

Conclusion:

Dealership arrangements can be immensely valuable for rental operators, but this is an area where state laws tend to vary substantially and “form” agreements appear to be almost non-existent.  Most manufacturers treat dealers well, and most dealers reciprocate, each recognizing the other’s importance to their overall business.  But markets, like relationships, tend to change over time, and what looks like a great deal today may look like a Caracas time-share tomorrow.  So consider your options, and read these agreements carefully.  Feel free to contact us if we can help.

About the Author:

James R. Waite is a business lawyer with over 20 years in the equipment industry. He authored the American Rental Association’s book on rental contracts, and represents equipment lessors throughout North America on a wide range of issues, including corporate law, negotiating and drafting dealership agreements, rental contracts, purchase options and related agreements, as well as buying, selling and financing businesses and their equipment.  He is a veteran of the United States Air Force, has a BBA in Finance from the University of Texas at San Antonio, a Juris Doctor from St. Mary’s University, and an MBA from Northwestern University.  He can be reached at (866) 582-2586, or via email at j.waite@wwlegal.net.