Lynch Law Firm, PLLC
Qualifying a New Overseas Product Distributer
Expanding Texas companies eventually expand overseas. This always initially sounds like a great idea but actually getting your product into the hands of foreign buyers is a lot of work. Distributers sell your products within their local market and make, or ruin, the success of your products’ move overseas. Here are a few of the considerations to explore before executing a contract with an overseas distributor:
What types of compliance programs does this distributer have?
As a US based exporter, you can get in a lot of trouble for what your distributer’s agent’s agent did. Your distributer should make some affirmative representations that they maintain an up-to-date understanding of US export regulations and only contract with others who do the same. This can be a very difficult thing when, for example, bribery seems the only way to accomplish things at some ports. Unfortunately, this is probably something a “cheap” distributer cannot perform. An also unfortunate truth is that the more regulated your product or the riskier you destination country, the more you will pay for a decent distributer.
What type of territory will this distributer have?
This is a major consideration for both the vendor and the distributer. Having distributers with clear geographic borders is easy but even this is not straightforward. What if a potential client outside their territory approaches your distributer, can they sell to that client? Conversely, does your distributer actually have the connections and manpower to reach all the areas in a certain territory or are you giving exclusive distribution to someone who is not able to sell anything.
Should you sign an exclusive deal?
Every distributer will push for an exclusive deal. This means that if your distributer is not good at their job, other distributers also cannot sell in that distributer’s territory. That being said, a good distributer deserves the empowerment of an exclusive deal. A good rule of thumb is to offer to consider an exclusive deal only after a one-year evaluation.
How many suppliers are currently being represented?
Important considerations here are that your representative does not have so many products he will forget to also sell yours. Relatedly, your potential distributer needs to have products to sell and they need to be parallel products sold to similar buyers.
What is the distributer’s relationship with the government?
In most places, distributers still need to have government contacts. Relatedly, in most places, distributers need to be registered with their government. You need to make sure that your potential distributer’s registration is current throughout your contract with them.
What are the distributer’s stats?
You should examine your distributer very well and like they are any other vendor. For example, questions about employee count, employee tenure, the particular person working on your product, and that particular person’s skill-set are important. Also, does the company and the person you are working with have the permitting required locally to sell the products you produce? What do the company’s financials look like? How and when are they going to pay you for products they sell?
Conduct your due diligence on a potential vendor.
Have you spoken to references? Have you done a background investigation on this company, the representative assigned to you, and other key stakeholders? Have you searched the Internet and other information sources to learn about this company? Also look into any partnerships, alliances, and agents this distributer uses and particularly those working with your product.
What do storage and logistics look like for this distributer?
One sure way to tell if your distributer is legitimate is to personally visit the distributer and see that he is not working out of a car or garage. You need to see if your distributer has appropriate storage facilities with appropriate space and climate control as well as back up generators and transportation equipment.
- How will the distributer promote your product?
Does the distributer have a web presence? What will your product look like within their webpage? Do you want them to publish pricing and can they publish pricing? Are they careful not to disclose any proprietary information?
What type of contract does your distributer require?
It will never be acceptable to use a form contract for new distribution agreement. In addition to all the items above, the list below is a very superficial list of the considerations in a distributer contract:
- The sales goals and thresholds
- Internal controls on theft, sales, and regulatory awareness
- Length of term
- Non-Compete section
- Other incentives
- Allocation of risks and costs
- Governing law of the agreement
- Governing language of the agreement
- Dispute resolution
- Force majeure matters