Tips When Using a Foreign Distributor
Many new to exporting companies make a decision early on in their market strategy – to use a foreign distributor. On its face, this seems like a no-brainer. After all, these distributors know the foreign market, the language, the culture, they have a network of buyers and have the physical facilities in place for storing, warehousing and delivery of product. This strategy is totally acceptable, but can have many pit-falls if the manufacturer does not take the time to LEARN the basics of exporting or if they treat this agreement as any other agreement with a domestic distributor.
Once a suitable distributor has been identified, the manufacturer needs to take time and great care in the legal agreement. This is where we start down a path that could be fraught with pit-falls. Using boiler-plate agreements are okay, but make sure they are comprehensive- use them as a starting point. Be clear on major points. Negotiating points takes time and is good for the relationship. It demonstrates your commitment and the seriousness to which you consider the relationship. Consider starting with a terms sheet and grow the agreement from there. Many countries do not negotiate the way we do in America. We are very legalistic and have to hash out every single point. Other countries go with more general agreements that are typically one-page.
Expect that the first agreement will not be accepted. If there is a back and forth, allow the time for the discussions. However, know when you are ready to walk away. Don’t feel you HAVE to finish what you started here. No clear agreements and no willingness to be flexible may be a sign of potential problems.
From the beginning, consider your “out” strategy. Every business relationship is good, until it’s not. The average length of time for a distribution agreement is 5-7 years. Things change – currencies can fluctuate, demand falls, political unrest – all these things can put a halt to your sales. What happens when you want to part ways – what happens to the inventory? It’s very acceptable to negotiate a short-term agreement initially to just see how it is going to go, then re-evaluate.
Get an international law attorney to negotiate the agreement. Using your local attorney is not good enough. Many agreements include jurisdictional provisions – subject to your state laws. However, if the foreign local laws are more comprehensive or favorable, it doesn’t matter what your contract states, the foreign laws will supersede. Many countries have “good will” laws and you might find your company owing that distributor a large lump sum upon termination of the agreement, even if it with good. cause.
Remember that you can align your company with a domestic agent, representative, or distributor. Many manufacturers do not consider using an Export Management Company as an international market entry strategy. Using a domestic company to generate you overseas sales is a viable option. You are using someone local, local jurisdiction apply, and typically there is a greater fiduciary relationship. These domestic EMC’s can locate buyers, negotiate the sale on your behalf and be a general resource to you.
As always LEARN about exporting. Many inquiries we receive at the Import Export Institute are from companies that have problems. The majority of these problems could have been avoided if someone within the organization had taken time to learn the process and planning strategies. By arming yourself with knowledge, you are always going to be a position to to ask the appropriate questions and better understand the options available to you. The Institute offers an International Trade Certificate program that is suited for any employee, at any level, who wants to gain a broad base of global business knowledge.