Most companies rely on agents or distributors to represent them overseas. So, it is important to understand the types of written agreements appropriate for each.
Click here for a webinar on finding overseas partners.
Click here for the ITA’s Basic Guide to Exporting (See Chapter 5.)
The advantages of direct exporting for your company include more control over the export process, potentially higher profits, and a closer relationship to the overseas buyer and marketplace, as well as the opportunity to learn what you can do to boost overall competitiveness. However, those advantages come at a price; your company needs to devote more time, personnel, and resources to direct exporting than it would to indirect exporting.
If your company chooses to export directly to foreign markets, it usually will make internal organizational changes to support more complex functions. As a direct exporter, you’ll normally select the markets you wish to penetrate, choose the best channels of distribution for each market, and then make specific connections with overseas buyers in order to sell your product.
Getting Organized for Exporting
A company new to exporting generally treats its export sales no differently from its domestic sales, using existing personnel and organizational structures. As international sales and inquiries increase, your company may choose to separate the management of its exports from that of its domestic sales.
Advantages of separating international from domestic business include the centralization of specialized skills needed to deal with international markets and the benefits of a focused marketing effort that is more likely to increase export sales. However, segmentation is sometimes a less efficient use of company resources.
Your company can separate international from domestic business at different levels in the organization. For example, when you first begin to export, you may create an export department with a full- or part-time manager who reports to the head of domestic sales and marketing. At a later stage, your company may choose to increase the autonomy of the export department to the point of creating an international division that reports directly to the president. Many smaller companies absorb export sales into existing functions; such an arrangement works effectively until export sales increase significantly—a happy challenge to look forward to.
Regardless of how your company organizes its exporting efforts, the key is to facilitate the marketer’s job. Good marketing skills can help your company operate in an unfamiliar market. Experience has shown that a company’s success in foreign markets depends less on the unique attributes of its products than on its marketing methods. Indeed, one of the companies profiled in this book began exporting by arriving in a foreign capital with a local phone book and a smile. You’ll not find a section on using phone books in this book, but it worked for the exporter in generating leads and eventual sales.
Once your company is organized to handle exporting, a proper channel of distribution needs to be carefully chosen for each market. These channels include sales representatives, agents, distributors, retailers, and end-users.
An overseas sales representative is the equivalent of a manufacturer’s representative in the United States. The representative uses your company’s product literature and samples to present the product to potential buyers. Ordinarily, a representative handles many complementary lines that do not conflict. The sales representative usually works for a commission, assumes no risk or responsibility, and is under contract for a definite period of time (renewable by mutual agreement). The contract defines territory, terms of sale, method of compensation, reasons and procedures for terminating the agreement, and other details. The sales representative may operate on either an exclusive or a nonexclusive basis.
Agents or Representatives
The widely misunderstood term agent means a representative who normally has authority— perhaps even a power of attorney—to make commitments on behalf of the company that he or she represents. Companies in the United States and other developed countries have stopped using that term because agent can imply a power of attorney. Instead, they use the term representative. It is important that the contract state whether the representative or agent has the legal authority to obligate your company.
The foreign distributor is a merchant who purchases goods from a U.S. exporter (often at a discount) and resells them for a profit. The foreign distributor generally provides support and service for the product, relieving the U.S. exporter of those responsibilities. The distributor usually carries an inventory of products and a sufficient supply of spare parts and also maintains adequate facilities and personnel for normal servicing operations. Distributors typically handle a range of noncompeting, complementary products. End-users do not usually buy from a distributor; they buy from retailers or dealers.
The terms and length of association between your company and the foreign distributor are established by contract. Some U.S. companies prefer to begin with a relatively short trial period and then extend the contract if the relationship proves satisfactory to both parties. The U.S. Commercial Service can help you identify and select distributors and can provide general advice on structuring agreements. It is useful to get some expert legal advice pertaining to the market in which the agreement will be in force. Some countries have complex labor laws that may affect your ability to terminate agreements, and in the event of a dispute you may want to stipulate how it will be resolved, such as via arbitration or in a U.S. court as opposed to a court in a foreign country.
You may also sell directly to foreign retailers, although in such transactions products are generally limited to consumer lines. The growth of major retail chains in markets such as Canada and Japan has created new opportunities for this type of direct sale. The approach relies mainly on traveling sales representatives who directly contact foreign retailers, although results might also be achieved by mailing catalogs, brochures, or other literature.
The direct mail approach has the benefits of eliminating commissions, reducing travel expenses, and reaching a broader audience. For optimal results, a company that uses direct mail to reach foreign retailers should support it with other marketing activities. For more information, contact the Direct Marketing Association at the-dma.org or the U.S. Postal Service at usps.com.
U.S. manufacturers with ties to major domestic retailers may also be able to use them to sell abroad. Many large U.S. retailers maintain overseas buying offices and use those offices to sell abroad when practical.
What is the most common and consistent channel for producing the desired result among smaller U.S. exporters? The answer is distributors.
Direct Sales to End-Users
You may sell your products or services directly to end-users in foreign countries. The buyers may be foreign government institutions, businesses, or final consumers via online sales. The buyers can be identified at trade shows, through international publications, by the overseas posts of the U.S. Commercial Service, or may find you via search engine results that you may or may not influence through search engine positioning strategies, purchases of online ads, key word auctions, and the like.
You should be aware that if a product is sold in such a direct fashion, your company is responsible for shipping, payment collection, and product servicing unless other arrangements are made. If the cost of providing these services is not built into the export price, you could have a smaller profit than you had anticipated.
If you choose to use foreign representatives, you can meet them during overseas business trips at domestic or international trade shows. A comprehensive list of upcoming trade shows can be found at export.gov/trade events. Another effective method you can use without leaving the United States is e-commerce platforms. Ultimately, you may need to travel abroad to identify, evaluate, and sign up overseas representatives; however, you can save time by first conducting background research in the country you’re targeting. The U.S. Commercial Service can provide the market research you need and introduce you to buyers in more than 125 countries.
Contacting and Evaluating Foreign Representatives
Once your company has identified a number of potential representatives or distributors in the selected market, you should write, e-mail, or fax each one directly. Just as your company is seeking information on the foreign representative, the representative is interested in corporate and product information on your company. The prospective representative may want more information than your company normally provides to a casual buyer. Your company should provide full information on its history, resources, personnel, product line, previous export activity (if any), and all other relevant matters. Your company may wish to include a photograph or two of plant facilities and products—and even product samples when practical. You may also want to consider inviting the foreign representative to visit your company’s operations. Whenever the danger of intellectual property theft is significant, you should guard against sending product samples that could be easily copied.
Your company should investigate potential representatives or distributors carefully before entering into an agreement with them. You also need the following information about the representative or distributor:
- Current status and history, including background on principal officers
- Methods of introducing new products into the sales territory
- Trade and bank references
- Data on whether your company’s special requirements can be met
You should also ask for the prospective representative or distributor’s assessment of the in-country market potential for your company’s products. Such information is useful in gauging how much the representative knows about your industry; it provides valuable market research, as well.
Your company may obtain much of this information from business associates who work with foreign representatives. However, you should not hesitate to ask potential representatives or distributors detailed and specific questions. Suppliers have the right to explore the qualifications of those who propose to represent them overseas. Well-qualified representatives will gladly answer questions that help distinguish them from less qualified competitors. Your company should also consider other private-sector and U.S. government sources for credit checks of potential business partners.
In addition, your company may wish to obtain at least two supporting business and credit reports to ensure that the distributor or representative is reputable. By using a second credit report from a different source, you may gain new or more complete information. Reports from a number of companies are available from commercial companies and from U.S. Commercial Service International Company Profiles. Commercial companies and banks are also sources of credit information on overseas representatives. They can provide information directly or from their correspondent banks or branches overseas. Directories of international companies may also provide credit information on foreign companies.
Once your company has pre-qualified some foreign representatives, you may wish to travel to the foreign country to observe the size, condition, and location of their offices and warehouses. In addition, your company should meet each sales force and try to assess its strength in the marketplace. If traveling to each distributor or representative is difficult, you may decide to meet each of them at U.S. or worldwide trade shows. The U.S. Commercial Service can arrange the meetings; it also offers videoconferencing, which can, in many instances, replace the need to travel.
Negotiating an Agreement with a Foreign Representative
When your company has found a prospective representative that meets its requirements, the next step is to negotiate a foreign sales agreement. U.S. Commercial Service offices provide advice to companies contemplating that step. The International Chamber of Commerce (iccwbo.org) also provides useful guidelines.
Most representatives are interested in your company’s pricing structure and product profit potential. They are also concerned with the terms of payment; product regulation; competitors and their market shares; the amount of support provided by your company, such as sales aids, promotional materials, and advertising; training for the sales and service staff; and your company’s ability to deliver on schedule.
The agreement may contain provisions that specify the actions of the foreign representative, such as:
- Not having business dealings with competing companies (because of antitrust laws, this provision may cause problems in some European countries)
- Not revealing any confidential information in a way that would prove injurious, detrimental, or competitive to your company
- Not entering into agreements with other parties that would be binding to your company
- Referring all inquiries received from outside the designated sales territory to your company for action
To ensure a conscientious sales effort from the foreign representative, the agreement should include a requirement that the representative apply the utmost skill and ability to the sale of the product for the compensation named in the contract. It may be appropriate to include performance requirements, such as a minimum sales volume and an expected rate of increase.
In drafting the agreement, you must pay special attention to safeguarding your company’s interests in case the representative proves less than satisfactory.
t is vital to include an escape clause in the agreement that allows you to end the relationship safely and cleanly if the representative does not fulfill expectations. Some contracts specify that either party may terminate the agreement with written advance notice of 30, 60, or 90 days. The contract may also spell out exactly what constitutes “just cause” for ending the agreement (for example, failure to meet specified performance levels). Other contracts specify a certain term for the agreement (usually 1 year) but arrange for automatic annual renewal unless either party gives written notice of its intention not to renew.
In all cases, escape clauses and other provisions to safeguard your company may be limited by the laws of the country in which the representative is located. For this reason, you should learn as much as you can about the legal requirements of the representative’s country and obtain qualified legal counsel in preparing the contract. These are some of the legal questions to consider:
- How far in advance must the representative be notified of your intention to terminate the agreement? Three months satisfy the requirements of many countries, but a registered letter may be needed to establish when the notice was served.
- What is “just cause” for terminating a representative? Specifying causes for termination in the written contract usually strengthens your position.
- Which country’s laws (or which international conventions) govern a contract dispute? Laws in the representative’s country may forbid the representative company from waiving its nation’s legal jurisdiction.
- What compensation is due to the representative on dismissal? Depending on the length of the relationship, the added value of the market that the representative created for you, and whether termination is for just cause as defined by the foreign country, you may be required to compensate the representative for losses.
- What must the representative give up if dismissed? The contract should specify the return of property, including patents, trademarks, name registrations, and customer records.
- Should the representative be referred to as an agent? In some countries, the word agent implies power of attorney. The contract needs to specify whether the representative is a legal agent with power of attorney.
- In what language should the contract be drafted? In most cases, the contract should be in both English and the official language of the foreign country. Foreign representatives often request exclusivity for marketing in a country or region. It is recommended that you not grant exclusivity until the foreign representative has proven his or her capabilities or that it be granted for a limited, defined period of time, such as 1 year, with the possibility of renewal. The territory covered by exclusivity may also need to be defined, although some countries’ laws may prohibit that type of limitation.
The agreement with the foreign representative should define what laws apply to the agreement. Even if you choose U.S. law or that of a third country, the laws of the representative’s country may take precedence. Many suppliers define the United Nations Convention on Contracts for the International Sale of Goods (CISG, or the Vienna Convention) as the source of resolution for contract disputes with buyers of their goods, or they agree to submit contract disputes to binding international arbitration. For more information, please visit iccwbo.org.
You may also find our article on Agents and Distributors helpful.