Selling a channel-based business

Startup Stock PhotosBuilding a software vendor in the enterprise space that uses resellers and VARs as a distribution channel can be a very good way to scale a business fast. Especially in the on-premise enterprise software market, it’s sometimes the only way to succeed, because as a startup you don’t have the resources to sell directly and you can’t provide local support without a partner.

If you later decide to sell your business, potential buyers will look closely into your channel business and reseller contracts. Buyers’ concerns will be that successful resellers might walk away after the acquisition or claim goodwill compensation if fundamental changes are made to their contracts. Some European countries have laws in place to protect resellers’ businesses. What this means is that if your buyer cancels a reseller contract or fundamentally changes it, the reseller might have rights to a share of your buyer’s future business for some years to come. Naturally, this isn’t what future buyers want when acquiring your company; typically it either decreases your company’s valuation or requires escrow provisions to address these concerns.

I can only recommend engaging an experienced lawyer early in the process when you decide to start a channel-based business, to draft contracts in the right way and discuss how to manage your reseller relationships accordingly to mitigate that risk.