As business continues to go global and the world becomes more connected, companies that want to grow should consider taking advantage of the opportunities across border. Not doing so leaves your business at risk of being left behind. Deciding where and how to sell and selecting the right route to market is essential for the success of a product or service. Exporting into new markets can be intimidating, but there are lots of options that allow you to dip your toe into a new market whilst adopting a degree of risk that you are comfortable with. Often those routes to overseas markets are not so different to what you would do domestically. In this article we will consider the main routes to market and the key advantages and disadvantages of each.
Distribution
Distributors will buy stock on their own account as if they were a customer. The distributor will then resell the product to its own customer base under your brand, subject to appropriate controls. Ownership of stock will pass to the distributor before resale to the customer, which means the distributor shares risk with you. This approach may benefit your business in that the sale of products to the distributor moves stock off your balance sheet immediately. One disadvantage of distribution is that the distributor is technically a competitor of your business, so you need to comply with competition law to avoid potentially severe penalties. For example, you can’t control the price at which the distributor is selling on products. If control over product pricing is an important factor for your business then selling direct or engaging an agent may be a better strategy to access new markets. Agents can be bound only to offer the products at the prices you approve.
Agency
Conversely, under an agency agreement, the seller contracts with an agent to find customers to buy the products directly from the seller. The products are not sold to the agent who then sells on. This has several advantages in allowing the seller to control to whom product is sold and the seller can also control the price at which the product is sold. The disadvantages of agency arrangements are that: i) the stock remains held by the seller until it is sold to the customer; and ii) commercial agents enjoy substantial legislative protection throughout Europe and sometimes further afield. For instance, legislation implies a variety of specific minimum termination notice periods and in the vast majority of cases, the agent will be entitled to compensation on termination of the agreement (which can be significant). It is vital to understand the implications of appointing an agent or a distributor as you are handing control of your marketing operations to a third party.
Incorporating a local corporate entity
Incorporating a corporate entity in some or all of your target markets is another option, but one which involves a greater degree of financial investment and paperwork. There may be tax and customs advantages and as a limited liability company, the new entity will have more credibility with banks, service providers and partners. For this reason, most companies only set up an overseas operation after testing the market. This can be a logical progression from working with an agent or a distributor as a company to grow its sales. However, there are some draw backs. A local entity doesn't necessarily get you any further forward if you don't have any local knowledge or connections, but one way to get over that would be considering a joint venture with a local entity, if you could find someone whose interests were aligned with yours. Taking legal advice on joint ventures is really important too, to ensure your rights are protected and each party's contribution is properly documented.
Direct sales from the UK
Direct sales into an overseas territory are reasonably straightforward from a legal perspective, but obviously drumming up sales will still require investment, perhaps in the form of your staff spending time in the local market, or advertising in the local marketplace. The advantage of this approach over the other routes to market is greater control over customer relationships and price. Potential disadvantages to consider are a greater upfront commitment of time, resource and finance to find and engage with customers. Other than that, you will obviously need to ship your goods to the local market, so as with all of the above options you need to work with an appropriate haulier, and you need to ensure that your terms and conditions of sale are appropriate for international use.
Franchising
Franchising is a business relationship in which the franchisor grants the franchisee the rights: (i) to use the franchisor's business model, brand or other intellectual property; (ii) to market and distribute the franchisor's goods or services; and/or (iii) to manufacture and sell products. For example there are a number of high profile examples of successful franchises such as pizza chains, hotels and mobile phone stores. The advantages of franchising are that you can use the franchisee fee to expand your business and reduce your debt and this may help you scale up faster than a non-franchised business. In addition, franchising will require fewer employees as there is no need for the owner to open and manage a number of branches. Disadvantages of franchising are that the franchisee may undertake activities which are detrimental to the franchise and the brand. Having a robust franchise agreement is crucial for this reason. Providing support and advice to a number of franchisees may also require a substantial time commitment on the part of the franchisor.
Womble Bond Dickinson's long term objective is to create a network of local businesses who can share their experiences and help each other to grow the volumes of international trade between our region and the US. Womble Bond Dickinson plans to hold a series of events focusing on particular sectors, themes and/or geographies within the US.
Womble Bond Dickinson is a transatlantic law firm with 31 locations across the US and UK, including offices in Leeds, West Yorkshire.
If you are planning to export goods and services from the UK then it is likely you’ll need legal advice to protect you against various risks. Please get in touch if you need any support.
