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Datamatrix – Offshore Representation

Suite 904

OFFSHORE REPRESENTATION


Foreign Representation

Direct Sales to end Users

Locating Foreign Representatives and Buyers

Negotiating an Agreement with a Representative

904.01 FOREIGN REPRESENTATION

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.

Sales Representatives

Overseas, a sales representative is the equivalent of a manufacturer's representative in your country. The representative uses the company's product literature and samples to present the product to potential buyers. A representative usually handles many complementary lines that do not conflict.

The sales representative usually works on a commission basis, 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

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 firm he or she represents. Firms in the United States and other developed countries have stopped using the term and instead rely on the term "representative," since agent can imply more than intended. It is important that any contract state whether the representative or agent does or does not have legal authority to obligate the firm.

Distributors

The foreign distributor is a merchant who purchases goods from a U.S. exporter (often at a substantial discount) and resells it for a profit. The foreign distributor generally provides support and service for the product, thus relieving the U.S. company of these 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 non-conflicting but complementary products. End users do not usually buy from a distributor; they buy from retailers or dealers.

The terms and length of association between the company and the foreign distributor are established by contract. Some companies prefer to begin with a relatively short trial period and then extend the contract if the relationship proves satisfactory to both parties

Foreign Retailers

A company 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. This method 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 traveling expenses, and reaching a broader audience. For optimal results, a firm that uses direct mail to reach foreign retailers should support it with other marketing activities.

Manufacturers with ties to major domestic retailers may also be able to use them to sell abroad. Many large retailers maintain overseas buying offices and use these offices to sell abroad when practical.

904.02 DIRECT SALES TO END USERS

A business may sell its products or services directly to end users in foreign countries. These buyers can be foreign governments; institutions such as hospitals, banks, and schools; or businesses. Buyers can be identified at trade shows, through international publications, or through Commerce's Export Contact List Service. (Contact your local EAC for more details).

The company should be aware that if a product is sold in such a direct fashion, the company is responsible for shipping, payment collection, and product servicing unless other arrangements are made. Unless the cost of providing these services is built into the export price, a company could have a narrower profit than originally intended.

904.03 LOCATING FOREIGN REPRESENTATIVES AND BUYERS

A company that chooses to use foreign representatives may meet them during overseas business trips or at domestic or international trade shows. There are other effective methods that can be employed without leaving the country. Ultimately, the exporter may need to travel abroad to identify, evaluate, and sign overseas representatives; how-ever, a company can save time by first conducting background research in your country. The Commercial Service contact programs, banks and service organizations, and publications are available to help in this manner.

Contacting and Evaluating Foreign Representatives

Once your company has identified a number of potential representatives or distributors in the selected market, it should write and/or fax directly to each. Just as the firm is seeking information on the foreign representative, the representative is interested in corporate and product information on your firm.

The prospective representative may want more information than the company normally provides to a casual buyer. Therefore, the firm should provide full information on its history, resources, personnel, product line, previous export activity, and all other pertinent matters. The firm 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 its operations. Whenever the danger of piracy is significant, the exporter should guard against sending product samples that could be easily copied.

A firm should investigate potential representatives or distributors carefully before entering into an agreement.

The firm also needs to know the following points about the representative or distributor's firm:

  • 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 the firm's special requirements can be met; and
  • A view of the in-country market potential for the firm's products.

This information is not only useful in gauging how much the representative knows about the exporter's industry, it is valuable market research in its own right.

A company may obtain much of this information from business associates who currently work with foreign representatives. However, exporters 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 sources for credit checks of potential business partners.

In addition, the 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, the firm may gain new or more complete information. Reports from a number of companies are available from commercial firms and from the Department of Commerce's International Company Profiles.

Commercial firms 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 firms.

If the company has the necessary information, it may wish to contact a few of the foreign firm's existing clients to obtain an evaluation of the representative's character, reliability, efficiency, and past performance. To protect itself against possible conflicts of interest, it is also important for the firm to learn about other product lines that the foreign firm represents.

Once the company has pre-qualified some foreign representatives, it may wish to travel to the foreign country to observe the size, condition, and location of offices and warehouses. In addition, the company should meet the sales force and try to assess its strength in the marketplace.

If traveling to each distributor or representative is difficult, the company may decide to each of them at domestic or at worldwide trade shows.

904.04 NEGOTIATING AN AGREEMENT WITH A REPRESENTATIVE

When the company has found a prospective representative that meets its requirements, the next step is to negotiate a foreign sales agreement. EACs can provide counseling to firms planning to negotiate foreign sales agreements with representatives and distributors. The International Chamber of Commerce also provides useful guidelines and can be reached at 212-206-1150.

Most representatives are interested in the company's pricing structure and profit potential. Representatives are also concerned with the terms of payment, product regulation, competitors and their market shares, the amount of support provided by the firm (sales aids, promotional material, advertising, etc.), training for sales and service staff, and the company's ability to deliver on schedule.

The agreement may contain provisions that the foreign representative:

  • Not have business dealings with competing firms (because of anti-trust laws, this provision may cause problems in some European countries);
  • Not reveal any confidential information in a way that would prove injurious, detrimental, or competitive to the firm;
  • Not enter into agreements binding to the firm; and,
  • Refer all inquiries received from outside the designated sales territory to the firm for action.

To ensure a conscientious sales effort from the foreign representative, the agreement should include a requirement that it 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 the drafting of the agreement, special attention must be paid to safeguarding the supplier's interests in cases where the representative proves less than satisfactory. It is vital to include an escape clause in the agreement, allowing the supplier to end the relationship safely and cleanly if the representative does not fulfill the firm's expectations. Some contracts specify that either party may terminate the agreement with written notice 30, 60, or 90 days in advance.

The contract may also spell out exactly what constitutes just cause for ending the agreement (i.e., failure to meet specified performance levels). Other contracts specify a certain term for the agreement (usually one 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 the supplier may be limited by the laws of the country in which the representative is located. For this reason, the supplier should learn as much as it 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 the supplier's intention to terminate the agreement? Three months satisfy the requirements of many countries, but a verifiable means of conveyance (i.e., registered mail) 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 the supplier's position.
  • Which country's laws (or which international conventions) govern a contract dispute? Laws in the representative's country may forbid the representative 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 the representative created for the supplier, and whether termination is for just cause as defined by the foreign country, the supplier 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 such as: 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 if the representative is or is not 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(s) of the foreign country.

The supplier should also be aware of laws that govern such contracts. For instance, the supplier should seek to avoid provisions that could be contrary to anti-trust laws.

The Export Trading Company Act of 1982 provides a means to obtain anti-trust protection when two or more companies combine for exporting. In any case, the supplier should obtain legal advice when preparing and entering into any foreign agreement.

Foreign representatives often request exclusivity for marketing in a country or region. It is recommended that suppliers 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 one year, with renewal possible. The territory covered by exclusivity may also need to be defined, though 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 a supplier chooses a U.S. law or that of a third country, the laws of the representative's country may define which law applies.

Many suppliers define the U.N. Convention on Contracts for International Sale of Goods (CISG) as the source of resolution to contract disputes or defer to a ruling by the International Court of Arbitration of the International Chamber of Commerce.

Please see ‘ Acknowledgements ' for sources of research

Unz & Co. "Basic Guide to Exporting" © 1998-9

AID TO TRADE
UNDERSTANDING TRADE
WHAT IS TRADE?
THE ORIGIN OF TRADE
THEORY OF INTERNATIONAL TRADE
ORGANIZATION OF TRADE
CURRENCY AND THE TRADING LANGUAGE
THE HISTORY OF CURRENCY
CURRENCY A UNIT OF EXCHANGE
THE LANGUAGE OF INTERNATIONAL TRADE
IMPORT / EXPORT TERMINOLOGY
TRADE ETHICS, TRENDS AND POLICIES
ETHICAL TRADING
RISKS AND REWARDS
ECONOMIC TRADE POLICIES
AGENCY FOR INTERNATIONAL DEVELOPMENT
GETTING STARTED
EXPORTING ? THE START
ASSESSING YOUR EXPORT POTENTIAL
PREPARING YOUR PRODUCT FOR EXPORT
PRICING, QUOTATIONS AND TERMS
MARKETING
MARKET RESEARCH
MARKET INFORMATION
MARKET ENTRY
THE MARKETING PLAN
STRATEGY, PORTS AND WAREHOUSES
EXPORT LICENCE
IMPORTING
AN EXPORT STRATEGY
SHIPPING
DOCUMENTATION, FOOD, DRUG AND ENVIRONMENT
DOCUMENTATION
BONDED WAREHOUSE
LEGAL CONSIDERATIONS
FOOD, DRUG & ENVIRONMENT
PAYMENT, CREDIT AND FINANCE PROGRAMS
METHODS OF PAYMENT
EXPORT CREDIT
EXPORT FINANCE PROGRAMS
EXPORT FINANCE PROTECTION
REPRESENTATION AND INTELLIGENCE
TRADE ASSISTANCE PROGRAMS
OFFSHORE REPRESENTATION
EXAMPLE FORMS
INTELLECTUAL PROPERTY
THE PENTHOUSE - INTERACTION
FINANCE
THE DIRECTORS CLUB
THE CONFERENCE ROOM
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