Florida Distribution Agreements: Buyouts and Buybacks
This article is Part 2 of our two-part series on the termination of beer franchise rights in Florida. For Part 1, see Termination of Florida Beer Distribution Agreements.
Florida’s Beer Franchise Statute (Fla. Stat. s. 563.022) recognizes that a Florida distributor acquires a valuable franchise right when it enters into a distribution agreement with a beer suppler (whether brewery or importer). A supplier is financially responsible for terminating the distributor’s franchise right unless termination is non-compensable under the statute.
Part 1 of this series covers the requirements for a non-compensable termination. This article addresses compensable terminations and determination of the compensation owed to the distributor.
Termination, Broadly Defined
It’s important to understand what is meant by “termination” in this context. Under Florida’s Beer Franchise Statute termination means and includes not only cancelation of termination of a distribution agreement, but also failure or refusal by the beer supplier to renew or continue the agreement regardless of any specific duration described in the agreement. A supplier also “terminates” a beer franchise when it denies approval of or unreasonably withholds consent to any assignment, transfer, or sale of a distributor’s business assets or stock. In essence, any action or inaction by a beer supplier that brings to an end the distributor’s right to sell the supplier’s beer is a termination for this purpose.
Determination of Buyout Price
Unless a supplier’s unilateral termination of a distributor’s franchise right is non-compensable under the statute, Florida’s Beer Franchise Statute requires the supplier to make payment to the terminated distributor. The amount payable is “reasonable compensation for the diminished value of the distributor’s business or of any ancillary business or both which has been negatively affected by the act of the manufacturer” and “[t]he value of the distributor’s business or ancillary business shall include, but not be limited to, its goodwill.”
The Beer Franchise Statute implies that the supplier and distributor should first attempt to negotiate the amount of reasonable compensation payable to the distributor. If the supplier and the distributor cannot mutually agree on the amount of reasonable compensation, they are required to submit to binding arbitration by a neutral arbitrator according to the American Arbitration Association’s rules. Each party pays one-half the arbitration cost. The award of the arbitrator is final and binding on the parties.
It is possible for the supplier and distributor to agree in advance upon the terms for determining the distributor’s reasonable compensation for compensable termination. For example, one Florida distribution agreement reviewed by the author describes “reasonable compensation” as “thirty (30) times the case equivalents of Products that DISTRIBUTOR sold to accounts during the 12 month period immediately prior to the buy-out date.” In a handful of other Florida distribution agreements, “reasonable compensation” is a defined as a multiple of annual gross profits. For example: “seven (7) times the Gross Profit dollars generated by the sale of BREWER’S product in the calendar year immediately preceding the notice of termination”. For this purpose, “Gross Profits” generally mean revenues less the cost of goods sold.
The Multiple of Gross Profits Formula
Contractual definition of “reasonable compensation” is rare in Florida beer distribution agreements, but Florida distributors do typically negotiate reasonable compensation using the multiple of Gross Profits formula. However, in the author’s experience, the accepted multiple seems to be increasing over time. Several years ago, it was common for distributors to cite a multiple of 2-3 times Gross Profits. More recently (as of February 2022), we have heard Florida distributors cite 4-5 times Gross Profits. Seven times Gross Profits, as quoted above, appears in a 2020 distribution agreement.
Buyback Upon Termination
In any termination of a Florida beer distribution agreement, the supplier is required to buyback the distributor’s inventory of beer and pay to the distributor 100% of its laid-in costs (that is, the price the distributor paid for the beer plus its reasonable costs freight, storage, and handling). This buyback obligation does not apply to beer that the distributor elects to keep, beer that the distributor buys after receiving the supplier’s notice of termination, or beer acquired from the other sources.
If the supplier fails to buyback the distributor’s inventory of beer and pay the required buyback cost within 60 days after the date of termination of the distribution, the Beer Franchise Statute imposes a civil penalty on supplier in an amount equal to 100% of the laid-in cost plus the distributor’s reasonable attorney fees, court costs, and interest.
Do you have any questions about Florida beer distribution agreement buyouts and buybacks? Contact us at email@example.com to schedule a consultation with a beverage attorney.
Because we’re attorneys: Disclaimer.