Getting the Itch to Go Global with a Foreign Distributor? Proper Vetting and Due Diligence Are the Keys to Success

By: Melissa Proctor (Polsinelli PC)

Companies tend to “get the itch” to begin selling internationally when they see their competitors going global, when they receive multiple inquiries from prospective buyers in foreign markets, and perhaps when they are approached by a third party offering to become their distributor in foreign markets. With regard to the latter, one of the initial decisions that must be made by a first-time exporter is whether to ship product directly to foreign customers, or engage a third party distributor to assist in this effort. The term “foreign distributors” generally refers to an unrelated third party that purchases goods from the U.S. seller, maintains an inventory of the goods in the U.S. or a foreign country, and sells the goods to customers in a pre-defined territory. As a result of its efforts, the foreign distributor will be entitled to keep the difference between the price it paid to the U.S. Seller and the price at which the goods are sold to customers in its territory. While it is true that using a distributor, especially in a foreign country, can alleviate some of the risks and burdens for U.S. companies, there are several steps that a U.S. Seller should take before jumping into the deep end of the pool with a new partner in a foreign market. For example, U.S. sellers should—

 

  • Carefully vet prospective distributor candidates;
  • Confirm who will be responsible for exports from the United States;
  • Identify the sales terms that will be used, and when title and risk of loss will transfer;
  • Determine whether the foreign distributor will be given exclusive rights to sell the goods;
  • Specify the territories in which the distributor will be allowed to market the products;
  • Set minimum purchase requirements that must be satisfied by the distributor;
  • Determine how much freedom the distributor will be given to set and modify prices;
  • Specify who will be responsible for potential warranty and product liability issues;
  • Specify the engagement period and when the relationship may be terminated; and,
  • Execute a robust, solid, and protective written agreement with the foreign distributor.

 

The most critical action item that U.S. Sellers should complete before jumping into a foreign distributorship relationship is the final bullet point regarding written agreements. Carefully crafted and detailed written agreements with foreign distributors should address all of the foregoing bullet point issues, as well as additional themes such as U.S. export and economic sanctions compliance, anti-corruption and anti-bribery restrictions, indemnification and hold harmless provisions, confidentiality and intellectual property protections, record retention requirements, and the governing law and venue that will apply in the event of disputes with the foreign distributor.

 

Entering into a foreign distributorship relationship can definitely reduce risks for the U.S. seller, expand its market share, and boost its bottom line; however, identifying addressing potential hazards of the road up front and carefully vetting new partners are the hallmarks of any successful new business venture.

 

Melissa Proctor is a Shareholder with Polsinelli, P.C. with significant experience in customs laws and regulations, export controls, economic sanctions, and international trade. She may be reached at (602) 650-2002 or via e-mail at mproctor@polsinelli.com.