Moving into the International Market

Snack manufacturers Burts Chips and Tyrrells are seemingly both having great success selling their products in the international market and are continuing to expand overseas. David Thompson looks at how other companies can address the niceties of making a leap into the international market.

Choosing your structure

A company should carefully consider how to structure their move into the international market. There are a number of options available, including: entering into a distribution or agency agreement; allowing direct sales in the overseas territory; entering into a joint venture; entering into a licensing or franchising agreement; or establishing a foreign subsidiary.

Often distribution or agency structures are used, as they allow the company to enter into international trade without incurring the cost of setting up an extensive supply chain.

Distribution Agreements

Through a distribution agreement, distributors are entitled to purchase a company's products and to sell these independently in the specific country under the conditions set out in the agreement. The distributor then takes a margin on the onward sales.

There are several advantages to choosing this structure:- 

• The distribution agreement is entered into between the company and a distributor who is normally domiciled in the overseas territory. There is no need to establish a physical presence overseas.
• No direct contract is made with the end customer, reducing the risk of any direct liability issues arising.
• There is no need to administer individual customer accounts overseas.
• A greater level of financial risk is passed on to distributor, as they buy specified quantities of stock, which should in turn motivate them to sell the products.
• Fewer issues on termination concerning compensation or indemnity (at least under English law) - in potential contrast to agency arrangements (please see below) .

However, it should be recognised that there are also practical disadvantages to this type of structure. The distributor will often demand greater margins as they are taking on a high proportion of the risk. The company may also have less control over the activities of the distributor than under an agency structure, including in relation to marketing. The entire credit risk will also lie with one party rather than being spread across a wider client base.

Agency Structure

With a traditional sales agency structure the business enters into an agreement to appoint an agent to act on their behalf in order to secure sales within a defined market. The agent is then granted a commission on the sales which it generates.
Advantages of the agency structure include:-

• Control over the terms of sale, including price.
• The flexibility to deal with customers directly which may be preferable, especially if the product is bespoke.
• Strong controls over marketing and brand image.

However, the company will have to be aware of tax issues in the local territory and will remain directly liable to customers. In addition there is potentially a significant financial liability to the agent on termination (depending on the precise circumstances in which the agreement terminates or expires). It should be noted that, whilst there are potentially some significant legal risks associated with this route, the company will benefit from a higher financial reward as the commission due to the agent will usually be less than the margin which is effectively taken by a distributor.

Contract terms

Whichever structure is chosen it is always vital to incorporate the right key terms into your agreement. Particular consideration should be taken in agreeing: the territory in which they can sell and market the product; the exclusivity of the agreement; the product description; minimum sale and purchase requirements; limitations on the use of intellectual property rights; after sales care; and duration and break provisions.

In addition, a distribution agreement should include: a price review mechanism; the terms and conditions on which products are supplied; restrictive covenants dealing with a distributor's ability to work with your competitors; and responsibilities for compliance with the local laws. 

In an agency agreement, along with the terms set out above, it is key to include terms governing: the scope of the agent's authority; commission and expenses; auditing; performance criteria; and compensation and indemnity.

Finally, any agreement with an overseas trading partner needs to address the issue of law and jurisdiction. Where possible you will, as a UK domiciled business wish to deal under your own local law. This is an issue which is often overlooked, but which lies at the heart of any legal relationship.

Practical tips

• Enter into confidentiality agreements before engaging in commercially sensitive discussions.
• Carry out due diligence - having full knowledge of the business you are working with should help to reduce your exposure to potential legal/commercial risks.
• Always enter into clear written agreements.
• Consider obtaining local legal advice.

 Alternative routes to market

As mentioned earlier there are other types of structures to be considered when looking to exploit overseas opportunities. These options will be discussed more fully in our next article.

For more information on these or advice on any of the structures detailed above please contact David Thompson on david.thompson@michelmores.com.