#209 - Operations Law 101: Co-Mans & Distribution Deals

24:30So if we can start with a contract where certain provisions, for example, are mutual, like confidentiality and indemnification, where there's reasonable language regarding IP, where you own what you bring to the command and enhancements they might make to that, but maybe they'll own their proprietary manufacturing processes and give you a license to use them. the ability to assign the agreement later on when you go to sell your business those types of things if they are in there they shouldn't be all that controversial you know that puts you in a good spot things that i don't like that sometimes are in there are limitations on liability where a co-man will say okay well you know if we mess up your product and someone gets injured god forbid your cap the purchase price for the product or something like that or you know those types of artificial limitations on liability and disclaiming responsibility for not doing your job, those feel inherently unfair.

25:27And those are things that we try to negotiate out. All right. Great answer. Okay, Ryan, let me come back to you. So a big part of this is pricing. I mean, we want commands that can make the product the way we want them to, to spec and high quality and all that stuff. But pricing is such a big consideration, especially these days, all the margin pressure, all the stuff that's out there. How do you think is the fair way to do pricing structure in a way that makes sense to everybody that also gives you incentives for as you grow to try to get the cost down? Yeah. So I think there's a little bit of going back to that turnkey and tolling situation.

26:04It's a little bit of a how much of a hands-on approach and how much of a hands-off approach do you want? Because when you start off with, let's say relatively early on, you may not have all the capabilities to go out and get all of your sourcing taken care of, to get all the things that are going in, and especially to do it with the volume that may be required, right? There's a lot of simple things. Just think of something as simple as salt. Your little brand that you may be starting off with doesn't have volume to get really, really great salt pricing to begin with. And so if you can instead do a turnkey approach to begin with, then you can start to leverage the economies of scale that the co-backer, they're buying salt for their 15 brands that they're producing.

26:46And you get a much, much lower price for that. And that can get passed through to your overall pricing. Instead, if you do a tolling approach, you have a little bit more of that control, the direct control and flexibility on what's going in. You can make decisions much more easily of, hey, maybe we want to increase the quality of a given ingredient into our product. Or maybe we want to find a cheaper substitute for it. Or maybe we just find generally there's a better supplier arrangement. And with a tolling arrangement, you have the ability to directly take advantage of whatever changes and pricing improvements that result from that.

27:22The flip side of that is that you're a lot more exposed to things as well. So I think there's not necessarily quite as much inherent alignment in a tolling approach, right? It's the co-backer, they're making products, they're taking the things that you're giving them, and they're just processing them. And if they spend a little bit more materials, maybe, you know, it takes a hundred pounds of something or 110 pounds of something to make a hundred pounds of finished products. Well, it doesn't really matter that much because they're still getting paid the same. On the other hand, if you have a turnkey approach, you're really putting everything, you're creating really great alignment for that, right?

27:57You are saying that, hey, if you can create a hundred pounds of products using only 101 pounds of inputs, then we can maybe share some of the benefits of that. And so you have a manufacturer that's more incentivized to be doing everything as efficiently as possible and minimize waste and all those things. And so if you have a tolling approach, you are inherently going to be subject or exposed to pricing adjustments that are going to happen, right? Maybe once a year, you'll have a conversation with the manufacturer and say, hey, utility costs went up, right? Well, it's pretty easy to talk about utility changes because that's not just a secret sauce number, right?

28:34There's utility rates in the area. They can show you exactly, hey, these are our prices that went up. And you're not getting it passed through every single month, so it should be easy. Same thing. There's all these indexes that will show the cost of labor in the area. And so the conversations are a little bit more simple. Whereas if you have a turnkey approach, then pricing adjustment structures become very, very important, right? On one hand, it's really great because let's say that one of the ingredients goes up for one month. Well, if you've agreed with them that prices for your finished products can only change once every six months or once every year, then eventually the coatbacker just has to eat that for a little bit.

29:11And you have a little bit more time to say, hey, we've seen this price go up, but we have a couple more months to start thinking about how can we change the marketing for our pricing changes? How can we get retailers ready to accept these changes? So it gives you just a little bit more cushion to deal with these changes. What it does do then, it creates a little bit more importance of when you do have those conversations, how often can they make these changes? How much of a price change can they make? So some of those are just making a decision about how much of a risk exposure is each party going to take.

29:44And there's not necessarily a one-size-fits-all approach here. I think it's really going to depend upon products, how complicated it is, how complicated the raw material sourcing situation is. And then in addition to that, who are we working with, right? is this going back to if you can get some information about on the day-to-day basis, how these codebackers work, that can really help inform which direction is going to be more helpful for your brand. Okay. And let me ask you, so when I had a contract with my command, there were some clauses in there. One was around exclusivity. It was like, okay, we want all of your volume for these SKUs.

30:19So, you know, you're signing that and for the SKUs that we were starting with them. So it actually didn't even include additional SKUs that we could launch later. But we were basically saying, yes, we will give you first right on all orders that we're going to do for this. And we also had volume commitments in there. Is that typical? And, you know, is that a good idea to have that kind of stuff in there? I would say I actually don't see it as the most common outcome. I think there is one place where you'll definitely see it is if there's startup costs involved. right? If the manufacturer has to make some type of capital commitment, go out and, you know, retool their manufacturing line or buy some equipment, they're going to make sure that they're protected by locking you in to make sure that they're going to get enough purchases to earn that back.

31:04There are ways that you can handle that too, right? You can basically say that maybe there's some type of per unit fee involved until they get paid off or something like that. But that's typically going to be the basis of where these things are coming from. I think they're both a little bit dangerous, though. I'm more concerned about volume commitments than I am about exclusivity. As long as there's not a volume commitment and you have done enough looking into this manufacturer and you know what you're getting yourself into, look, you may have to only work with them, but at least it can be something that doesn't necessarily have the risk of killing the business until you can get out of the term.

31:39With a volume commitment, though, sometimes I've seen this happen. Everyone has very rosy forecasts going forward, right? We all think that we're going to be the next billion dollar brand. And sometimes you're only the next hundred million dollar brand. And if you go and create on commitments based upon being a billion dollar brand, there's going to be consequences for that, right? If you don't hit those volume commitments, manufacturer doesn't just say, hey, no problem. There's typically going to be payments required. So we'll see something called a take or pay concept where you either need to place an additional order to catch up with your volume commitments, or you have to make a basically a penalty payment for that missed volume.

32:17And in CPG world, everyone is always a capital intensive process. There's a lot of different ways that that money can be spent. And so it's just throw away money just because you're in a position where the brand is already not getting the volume that you had anticipated. It can be potentially a little bit of a death knell or something close to it. And so I think that you should try to avoid these concepts as much as possible, except to the extent it's just truly necessary to get the manufacturing relationship off the ground. Because if it doesn't get off the ground, potentially maybe you just don't even have a business to begin with.

32:50And so that's really the only situation that I would recommend getting into that. But it is, you have to do it eyes wide open and be aware of all the risks associated with that. I gotcha. Okay, so let's maybe close out this part of the co-man discussion. Anthony, what is some horrible stuff you've seen happen? On co-mans, I know you've seen a bunch. Like, where has it really gone bad? Yeah. So we're just talking about exclusivity. And Ryan was saying, well, you might rather be exclusive to one co-man than have onerous volume commitments, which I totally get. Though I've also seen clients who have only had one co-man.

33:28Maybe there wasn't even exclusivity, but they just didn't have the redundancy in place. And then things happened to that co-man. I had one client whose co-man's facility caught on fire, which is obviously problematic. and they didn't have supply for, I think, the better part of six months as a result. And not having supply for six months, it took them years to kind of catch up and regain that momentum. I had another client whose co-man literally just went bankrupt like a month ago. So there is risk to having one co-man, whether or not you're exclusive to it. And having redundancy in your supply chain is often a luxury.

34:04And it's not something that startup companies can manage because they don't necessarily have the volume to spread across or the resources to spread across several manufacturers. But as companies grow and scale, they should look toward potentially having that redundancy. One, to avoid that horror story of the co-man catching on fire or going bankrupt. But two, it keeps your partners honest because you kind of compare terms in essence and your co-man knows that they're not your only source of supply. So they don't necessarily have you over a barrel on payment terms or material pricing and those types of things.

34:42So certainly I favor redundancy. So if you can get multiple sources of supply, or at least have an eye to do that as you grow, that's a big win for a brand. And then, you know, we talked about IP before I had a brand come to me, and they had an agreement in place where they didn't own their formulation and they had gotten to the point of doing a strategic transaction and they could not complete the transaction without getting the co-man to essentially assign the formula over. $10 million later, it was assigned and owned by the brand, which then completed the transaction. Luckily, it was a big transaction.

35:20So$10 million was a bit of a rounding error, but still no one wants to give that away to your co-man. So that kind of goes to just being aware of the key terms when you're entering into these agreements in the beginning. And a lot of times an ounce of prevention is worth a pound of cure. So I would really be focused on it and not be afraid to ask questions and get help. We'll be right back. Are you going to crush it on Amazon this year? It's such an important channel, but it's so hard to do alone. And most agencies are a total ripoff. We can't afford$5 ,000 a month and a commission on our sales.

35:54They just don't get it. That's why I love our partners at Daybreak. They are full service, meaning they do the creative work, the listings, the logistics, and of course, all the ads, all with the most reasonable retainer out there. I work with them personally. I'm so grateful we have such a good partner to recommend out to you, our community. They do evaluate your product first to see if it might be a fit. So if you want them to have a look, email them startupcpg at daybreak.agency and they'll do a free audit for you. Good luck, everyone.

36:26All right, that feels like a good place to move on from co-man agreements now that we've just scared everybody sufficiently. So let's assume that you actually navigated those waters successfully. And now we're in the area of distribution agreements. So Ryan, maybe you could kick us off and can you just tell us a little bit about distribution agreements in general and some of the key elements and clauses? Yeah, so distribution agreements, as we touched on a little bit earlier, is this is how you're going to get your products on market, right? Ultimately, you have to get the products into customers' hands because most of our clients are not people who actually own a bunch of freight trucks all over the country.

37:04You got to engage someone to do it for you. And so I think the biggest thing to be thinking about is what type of routes are we looking for here? What type of distributor are we talking about and where are they going to serve? And so the biggest thing to start off with that really drives a lot of this is what's the territory or market that we're looking at, right? is that especially in the beverage world, a lot of this is really split out by geographic scope. So if you've got like a DSD distributor, maybe they'll cover all of Oregon, and maybe they'll cover specific counties in Oregon. And so in order to fill out a broad blanket of distribution amongst the whole country or wherever you're trying to go at, you may have to go get another distributor to fill in the cracks.

37:45And so that's the biggest thing is are we looking at a geographic scope? Are we looking at maybe certain types of channels? sometimes looking at only natural or specialty, or maybe looking at only convenience or food service or military. You know, there's specialty distributors who only handle like the military channel. And so if you're going to ultimately wind up with products being sold to as many people as possible and as many channels as possible, there's going to be a lot of distribution agreements that you have to enter into. And it's very important to make sure that the territory and market scopes are not overlapping.

38:22And so another Bitcoin is around, is it going to be exclusive or non-exclusive? If it's exclusive, then it becomes a lot more important to make sure that, hey, no other distribution agreement is potentially going to involve products coming into this. For scope of products as well, is this going to cover all of our products that we're currently selling? Is this going to cover new products potentially? Eventually, if we decide to introduce a new size of a product, is that going to automatically get captured? Or maybe is there another distributor who would be a better alternative for that? What about if it's a completely new brand?

38:55Sometimes founders are often people who have a lot of ideas. And despite spending 18 hours a day on one brand, they may still have ideas for what are we doing next? And so the question is, all these agreements that you agreed to with everyone, is this going to capture that or not? Big thing to talk about is around termination and how long is the term going to go for the agreement and what's the termination situation look like. As usual with all these agreements, pricing and payment terms and pricing adjustments are always going to be important as well. Same thing as well with minimum purchase or sales targets.

39:29Are there consequences for, hey, you have to go out and sell a certain amount or there's consequences? is a big one. You know, distributors are really going to be in some ways a little bit of your, the face of your brand out in the market. And so a lot of what these agreements cover and talk about too is what are the marketing and promotion obligations? Are they going to have to come in and be our partner? Are they, we're going to share costs 50, 50 on promotions? How are we going to handle slotting fees? Are they going to have personnel in the market who are going door to door and like rearranging everything for you?

40:01Those are probably the biggest ones. And just one other one is non-compete too, right? Sometimes don't really love, hey, look, if we want you selling our water brand, are we comfortable with your saying trucks carrying our direct competitors water brand as well? Because are you actually going to be focusing on selling us to the best of your ability if that's the case? You know, when distributors are in the market of selling as many products as possible, so they're usually a little bit hesitant for that, but ideally would like to make sure that people are focused on your product as much as possible.

40:30Okay, that makes sense. And I think maybe a lot of brands out there, they might start with, let's say, a broad liner distributor, maybe UNFI or Kehi. And, you know, a lot of that stuff may not come into play with them because typically they're not going to ask you for an exclusive territory. Like they're really more about, oh, you want to get your product to these retailers? Well, we serve all the major retailers. We can do all that. And obviously have contracts with them as well. But, you know, things like territory rights. But that definitely does come into play when you're looking to build out your DSD network, your direct store delivery network, and you're trying to figure out how am I really going to crush this one market?

41:06Well, I go with these specialists and, you know, obviously difference being DSDs actually put your product like on the shelf, do it, you know, let's say more like full service, but also it can be a little bit more expensive, but they can really own a territory. And so, you know, when I've gone through that contract, I would say it is maybe one of those scenarios where probably if you take their contract template, it's going to be very favorable to them for where it actually starts out right and it's gonna say like we absolutely have complete territorial rights over this whole territory if we even sniff another distributor we you know get to absolute like own your company and you know i'm exaggerating obviously and the termination rights that they propose can also be very tough for nearly brand like if you ever want to leave us, then you must pay us five full years of revenue or something really difficult for a brand.

42:00And where do you typically see that stuff start to where you think brands are able to kind of negotiate stuff? Yeah, I think there's definitely a lot more of a battle on the distribution side of things than co-backers. For co-backers, as Anthony mentioned, we know we're typically getting something that's along the line of fare. I think for distributors, we are getting something to your point that is absolutely sometimes a little bit absurd that there's some things being proposed. There's what I would call market terms for some of these things. Like we'll talk about termination payments in a second.

42:33We will get proposals that are 3X or 4X what a market standard would be or 10X or something like that. It's a little bit crazy. So I think that the biggest things that you're probably going to be focused on battling with of these, I would say probably looking at, I think termination rights is going to be the biggest one. Usually you are getting whatever you're getting with respect to exclusive or non-exclusive appointments and what territory you're getting. Those are things that are not super negotiable. It's just that's the business that they're running. If that's what you sign up for, then that's what you're signing up far.

43:09But in terms of the consequences of deviating from that, of not respecting, maybe breaching the agreement in some capacity or potentially looking at an early termination, that's where there's usually going to be some wiggle room. I think our firm has basically done agreements with almost every single distributor out there in the country at this point. And so we usually have a good reference point of, hey, does this distributor have room for negotiation? Or it doesn't matter if you had 10x the revenue and you're the biggest player in the space, they're just not going to accept anything different.

43:43And so I think it is helpful to utilize community, utilize good advisors. We don't spend a bunch of time fighting for things that you can't get. Probably the things that you're typically trying to push on most. Yeah. And I've talked to a lot of people who have negotiated these things and I've negotiated some of them. And yeah, you can get some ridiculous proposals coming in, but just some stuff that feels very difficult to negotiate. Also like, hey, we want this whole territory. Maybe you've already opened up some nice retail chains and now you want a nice DSD in the area. And they're like, great, we want everything to work with us.

44:16You must give us those stores. In some instances, the DSDs are actually not that good in some of the chains. And the buyer might even tell you that like, yeah, we don't like working with them for these stores. They do not cover us well. They don't give us good service. If you don't have that in the contract where maybe you've done a carve out as they call it, just giving yourself some kind of option with them, then it can be tricky. And maybe that buyer is not going to want to work with you in that instance. But I've seen people get pretty creative around that kind of stuff where maybe they're like, okay, we either can just carve out these retailers, maybe the stuff that we've already gotten, which I don't know, maybe the DSD doesn't want to work with you, though, if you're not bringing them a lot of business, you know, so you kind of have to talk about that with them.

44:58But then And also I've seen things like, okay, if we don't go with you for some accounts, then maybe we'll give you a small payment based off that kind of invasion fee. I think they call it to service their territory with somebody else. And then also it can be a little complicated also if you have a national retailer or a big regional retailer, and then they just have some stores that's in one of your territories with another DSD. And they're like, look, the DSD would love it. They're like, yeah, we want to service that national retailer. We want that volume. national retailer is like hell no i don't want some other distributor just servicing like four of my stores like we're not going to do that with you so i think just you know having that those templates to go up and knowing what stuff to ask for at the onset you might get bush back i don't know you'll learn pretty quickly what's important to them and what's important to you right does that anthony what do you think does that sound reasonable yeah it sounds reasonable and i think you bring up a great point regarding the invasion fee that's one way to give yourself optionality There's also the concept of putting a purchase commitment in there.

45:57Now, if they can't grow your business by a certain percentage every year, maybe you shouldn't be tethered to them forever. So that's another thing to consider putting in these agreements. I will say that a lot of our clients do have success using kind of a client driven template, at least as a starting point to negotiate these agreements. And really the benefit of doing that is that you kind of have everything in one place that's protective to the brand and fair. And then you just you can kind of gauge what they push back on instead of trying to think, did I miss something and, you know, kind of negotiating the distributor's agreement that I forget to put this in that I forget to put that in.

46:36it's kind of easier to work off of your own template. So for a lot of clients, what we'll do is we'll set them up with a form that matches their business and their goals. And they use that as kind of the lead with these DSD distributors. And usually there's, you know, at least some willingness to engage in a back and forth. It doesn't mean all the conversations are easy, and it doesn't mean you win all the points. But it means that something like an invasion fee, at least you're putting it in there initially, maybe it gets negotiated out, but you're never like, oh, did I forget to ask for that?

47:07What is market rate on some of these termination fees? Like if you're going with a DSD that has a good reputation, what do you think? Because obviously like they're going to build your brand. They're like, look, we are awesome at this. We deliver to every single point of distribution that you want because of those relationships. We are just going to absolutely crush with your product. We're going to get it into all of these points of distribution. You don't get to just take that from us and leave and go somewhere else, right? Like if we build that, you know, we're going to want some kind of compensation if you then sell the brand and go to a national, like a big CPG that's going to take over the distribution from us.

47:42So I think it like it makes sense why they asked you for some kind of a termination clause. But like, what do you think is reasonable in some different scenarios for them to like, yeah, ask for like, you know, three to five years of like the overall revenue they would make for each one or profit? Or what do you think is within the realm of possible or reasonable? I mean, I'd like to see it no more than two years of gross profit. Ryan, I consider you the DSD expert, so you can fact check me on that one. But I think two years would be reasonable. I think there's been a trend upwards over the course of my career.

48:20I feel like it used to be lower. We used to see one year as really kind of the standard. And I think what's happened is slowly you hear stories about people pushing for a little bit higher and the distributors say, well, why shouldn't I get that too? And then there's just been a slow increase. When you're looking at this, you're looking at, hey, I need to sell more products to grow my brand. And this is a distributor who's telling me they're going to do a great job. And so you look at the option of, okay, I can either go and start this relationship and sell right now and potentially deal with a termination payment down the road, or it can not sell and I just don't have a business to sell it for down the road.

49:00I think in some ways, because it is a future problem, maybe there's a little bit more just willingness to accept higher numbers. And so I think there are definitely, you can get 1X. There are a lot of distributors who still only require that. And there are distributors require more than 2X, right? 3X is not an unheard of thing. Sometimes we'll see in like tiered structures, maybe even a 4 or 5X, which is tough to swallow, right? Because at some point, if it gets so high, it becomes a question of, is this volume actually worth anything when down the road, I'm going to be giving out such a big portion of it to just pay this termination payment in connection with sales.

49:38But I would say 2X is you're not, shouldn't be losing sleep about 2X. That seems to be about on average where the market's at right now. Okay. 2X profit. I think the one thing I was going to add is there's termination of a distributor when you're still kind of growing your business. And that's tough on the bottom line of the company, especially when the company is still trying to fund other parts of its operations. And then there's termination of your distributor network, maybe in connection with sale to a strategic. And that could look potentially a little bit different in terms of just how a brand handles that.

50:15And I think one thing to be cognizant of is you want to have your distribution agreements assignable. So when you sell your business, whoever buys you can assume those distribution agreements. And then if they want to terminate those distributors and integrate them maybe into their own distribution network, that might not necessarily be something that a company bears the cost of, but that's something that the acquirer bears the cost of, because that's something that they want to do, not something that the business necessarily needs. So just another thing to think about when you're entering into these clauses that it could be an expense to the company, but it could also be an expense that you can defer or pass on to someone who buys your business if they're looking to change out your distribution network later on.

50:58Just to be clear though, an acquirer usually is going to take that into account when determining their purchase price. So yes, they will take on the obligation to pay for it, but they may net that out of the purchase price that they're paying. Sometimes, not always, but it's always at least a factor to consider. But yeah, I think I agree that's the most common situation. It is a regular occurrence though that I have a client coming to me complaining about some distributor and saying, can we take a look at the contract and see how we can get out of this because we're not happy with our performance.

51:28and they're holding back our growth in some capacity. So it's definitely more harmful or tough scenario to go through. But it is the reality that if you've got 100 distributors, at least a couple of them are just not going to be doing as great of a job as you would like them to probably. Yeah, I like the idea of people thinking about it almost from like a paranoid catch and kill type scenario. Like, what if they just do this to slow us down? Like, okay, we need to have the provisions where we can actually at least talk about it, like if they're not hitting the growth numbers. in general my feeling is that like though you really want to like think more about if it goes well what are the things that we need to worry about versus like if it goes really poorly and both people are unhappy probably the distributor is not going to want to keep you around regardless right like they're busy they don't want to like deal with you for many years of just like a couple cases a week going on like at least the distributors that i've talked to in most cases are going to be like yeah you can just go if it's not going well for either one of us like may not even enforce a lot of the stuff.

52:27Do you see that also? Or is that just me? I definitely see that some distributors are very happy to just end the relationship and go their separate ways. Yeah. And then, you know, just let's talk about some horror stories. Also, some of the stuff you guys have seen really go wrong. Well, one thing I've definitely seen is clients who have been approached by distributors in other countries, and they look at it as, oh, well, I don't really care what's going on, it's going to be free revenue, whatever comes in. And they'll start discussing with the distributor, possible relationship. And before they know it, their trademark is registered in that country by the distributor.

53:05And the distributor kind of, you know, has them over a barrel a little bit. So I always caution clients that if you're doing or considering doing business overseas with a distributor, one, you should always have your trademarks registered and your IP protected before you even start those conversations. And then two, kind of the general rules of the road for a DSD agreement. We don't like to see those apply to those international distribution agreements. We like to have them much less sticky, you know, termable upon notice, no buyouts, prepayment for products. So you're not hunting for payment in Australia or wherever, you know, whoever you're dealing with and wherever they are.

53:46So that's certainly one thing that I've seen on a number of occasions. Any countries where that especially can be tricky? I know, I mean, when I've worked at brands, we've gotten a lot of interest from places like Saudi and yeah, like I think Australia, I've seen a couple, any markets where you're kind of like, yeah, if you're getting interest from that market, definitely get your trademark registered very quickly. It's funny that you asked that question because I was thinking about that this morning and I was thinking to myself, what's up with those Australians? What are they doing? Because I've had a couple of clients that have had the same thing happen to them with their trademarks when they're dealing with distributors in Australia.

54:24I don't know what it is about them. Crikey. All right. Watch out. I just, you know, wherever it is though, even if it's not in Australia, if it's in, you know, China, the UK, wherever it is, you should have your IP buttoned up because it's just the best practice. So, you know, as we're kind of wrapping up here on distribution, obviously you also have to have your product sitting somewhere in order to distribute it. So just anything you want to highlight overall about that, about, you know, working with those warehouses, 3PLs, like, you know, product sits there, you know, you need to kind of make sure you're not going to be liable or insurance, anything like that, Anthony?

54:59Yeah. So a typical warehouse agreement, a typical 3PL agreement is going to disclaim a lot of liability. Essentially, if anything happens to the product that's not caused by failure to act reasonably by the warehouseman or the 3PL, for example, a tornado hits the facility and destroys your product, that's going to be your responsibility. So I think those types of agreements drive home the importance for insurance and making sure that you have broad insurance coverage in place that protects the products once it leaves the manufacturer, enters the warehouse, and then is on its way to the retailer.

55:38And other thing our clients struggle with is finding a good warehouse and a good 3PL partner. And frankly, once they find someone who can deliver on performance, we'll help them navigate the commercial terms just to make sure that they make sense for the client. It's hard enough to find a good partner. So once they find it, they usually hand us the contract and say, make sure it's okay. And we're protected. And typically, it's always the same type of issues, the limitations of liability, is there enough insurance in place, that type of stuff. And it's, these are things that we typically navigate, and they never really hold up doing kind of a deal with one of these partners.

56:16It's just something that the client should be aware of. Nothing like thinking through all the stuff that can go wrong and to really just kind of turn your stomach, right? I mean, when I was running a brand, that was the thing that faster than anything else could just ruin my week. Like all of a sudden, yeah, lightning strikes somewhere and you're out of inventory. Like what can you do? Because yeah, especially when you're growing brand, it's not like you have so many risk mitigation things in place, so much diversification. Like typically there's not a lot of duplication in your supply chain. You've got one supplier for most of your ingredients and you're relying on the timing that they tell you.

56:51and probably you're just in one, maybe two warehouses and you've got your one manufacturing partner and it's just fragile and something can go way wrong. And even if there's a contract in there that says like, well, I ordered that ingredient, you didn't deliver it to me, so now you owe me that. It's still, you're the one responsible for your overall supply chain and that could prevent you from being able to produce your overall product. And that's not gonna be the fault of the one person who didn't give you that one key ingredient that you can't make the whole thing without. They're just responsible for kind of their part.

57:22So it's I like the idea of just trying to button up as much of this as you can, but also just being very vigilant because that's what it takes. Right. When we're talking about physical products that have a lot of different people involved. So good that people will know about you guys to help them, basically, is what I'm saying. So just kind of as we wrap up here, Anthony, any overall thoughts that you have about legal mistakes that you're seeing from early brands a lot in their overall contracts for ops? I guess I would say that, you know, we have clients that rush to sign and they want to sign right away and they don't necessarily pay attention to all the terms or frankly, whether not signing a contract and living in the state of nature is potentially better in the short run.

58:06So we're big advocates for negotiating and getting a good contract in place. You know, sometimes might not make sense to negotiate an entire contract right now or for a client to sign what's just presented to them. Maybe it has these limitations of liabilities in it that are artificial and actually worse than not signing anything. Maybe the IP language is worse than not having anything in place at all. So I would just caution brands to really be vigilant in what they sign, not rush to sign anything and really think it through. Because again, I think signing a bad contract is a lot worse than not signing anything at all.

58:43All right, Ryan, back to you, maybe just to wrap up here. So what if you are in one of these bad situations? You're like, oh, I did sign it. It's not great. And we just kind of live in that world. What do you do if you're a brand in that point? And maybe you're sitting on some bad contracts or stuff that is just really going to prevent you from growing the way that you would like to. Is there something that you can do about it? Can you revisit those or try to renegotiate? Yeah, so it does depend a little bit upon how strict some of those requirements are. I think that's why, Anthony's point, it is so important to make sure that a lot of these details are ironed out because if the agreement is relatively loose, you sign an agreement, but it's a bad agreement.

59:24And let's say maybe it's exclusive and there's not really any hard requirements for them for the counterparty. They just have to generally do the service and it doesn't talk about how well they have to do it or how timely they have to do it or anything like that, you are going to have a hard time pointing to an issue. And so I think it's part of the reason why it's so crucial to make sure that the agreement is clear about what we're going to require, what's going to be considered an issue, be very clear around specifications. if you're a co-packer to say, hey, one of the most common things we see is that we, our idea of a product is this and they're producing something different.

1:00:06And if your specifications don't actually say that or don't align with what you had as an idea, it's kind of hard to say that they're not doing what they're supposed to be doing under that. And so that goes to the point of, okay, well, what is the term and what does the exclusivity look like? Because if you're locked into a term and it's an exclusive term and there's not really any hard requirements in a contract that they're breaching, then your best bet may honestly just be to wait for a year or two or however long it is until the agreement ends. And that is not a very fun situation to be in.

1:00:37I have seen it happen multiple times. And the last six to 12 months, you start getting an agreement worked up with whoever's going to replace them. But otherwise, if you have the ability to, hey, this is not exclusive, maybe we can go start talking to someone, or we don't necessarily need to buy a certain amount. Well, maybe you can start buying from an alternative supplier, or there's a requirement that they have to be doing things in accordance with certain specs, in accordance with certain quality requirements, and they're not hitting those, then this can be a breach situation, right? Get a lawyer to send a letter saying you're in breach, and if you don't fix this in 30 days, the contract's over.

1:01:13And so there's definitely ideally things that either don't bind you to the contract 100%, or issues that the manufacturer is having or whoever the counterparty is that you can point to. And if so, talk to an attorney, talk about what we can do as next steps to take advantage of that. And without that, sometimes it's really just living in the bet that you made and trying to wait it out until we can move on to something else at the end of the contract term. All right, great advice. Gentlemen, as we wrap up here, any words that you can leave everybody with, hopefully include also if people want to follow up with you guys and the G Newsie Lewinden team.

1:01:52What's the best way for them to do that with you guys or just the company as a whole? Anthony, you want to close us out here? Yeah, absolutely. So if you're in need of legal help, you feel free to reach out to us. We'd love to talk to you all. You can email me at anthony at gllaw.us or ryan at rhall at gllaw.us. You can check out our website at gllaw.us and our Instagram. I love it when lawyers are on the IG.

1:02:21sometimes quite a bit yeah what are we gonna find there some good memes maybe you know i think we probably need to get a social media intern to just keep us fluent with gen z on on this uh-huh let's make sure they get a good contract all right all right thank you ryan thank you so much anthony as well these are some of my favorite kinds of podcasts to do where hopefully a lot of brands will get help from lawyers to make sure that they have a good contract and or ask them to slack, get some help from people who have done this kind of stuff before. But if they're not going to, I think this podcast will also help them a lot just to even understand the categories of things that they should be asking about, because the co-mans know about all this stuff.

1:03:05They've done it in contracts before you as a new founder haven't. And so if you don't know to ask about it, it probably can only hurt you. So a lot of protections and just ways to keep the overall relationship better. And, And, you know, we talked at the beginning about like, yeah, all of this stuff can protect you legally, but it also can preserve the relationship that you can have with your co-man, which is really what you want. And the key to, I think, having a successful growing partnership. So it's just really nice when everything is clear and everyone understands what happens if things go well and if things don't and just general kind of order and operations of things.

1:03:40So thank you both so much. We really appreciate it. And I hope everybody really has enjoyed the episode and all the learning as much as I have. All right, everybody. Thank you so much for listening to our podcast. If you loved it, I would so appreciate it if you could leave us a review. You could do it right now. If you're an Apple podcast, you can scroll to the bottom of our Startup CPG podcast page and click on write a review. Leave your company name in there. I will try to read it out. If you're in Spotify, you can click on about and then the star rating icon. If you are a service provider that would like to appear on the Startup CPG podcast, you You can email us at partnerships at startupcpg.com.

1:04:21Lastly, if you found yourself grooving along to the music, it is my band. You can visit our website and listen to more. It is superfantastics.com. Thank you, everybody. See you next time.

1:04:47Thank you.