Steps to Take Before Setting Up an Overseas Distributorship Agreement

On overseas sales, always hire good international counsel before you begin

Don’t take the path of least resistance when it comes to monitoring your sales. That could land you in a situation like this one: You’ve hired a salesperson and he doesn’t sell. You wait three, six or possibly nine months with zero new business before you scratch your head and ask yourself, “Why haven’t I terminated this person for lack of performance?” In the case of international sales or distributor agreements, it becomes even more complex when a party -- whether an individual or company -- does not perform to expectations because it takes a longer time to prequalify a new candidate.

The geographic locale alone–typically thousands of miles away–makes it doubly hard to monitor progress and determine whether the sales arrangement is working or not. This article outlines steps to take before setting up an international sales or distributorship agreement, which will protect you should something run afoul.

1. Hire good international counsel. It’s fantastic that your best friend’s brother lives in Portugal and wants to serve as your exclusive importer on the gourmet chocolate-covered cherries you produce. That doesn’t mean you should start exporting boxes of cherries to him without a formal sales contract in place. Why? Because you want legal protection should something run amok. Check emotions at the door. A good international attorney will watch out for your best interests and help you craft a contract that is a win-win for both parties. Make sure the attorney knows the lay of the land in the country you are operating.

The attorney should know the buyer’s law like the back of his or her hand.

2. Make the contract’s term short in duration. Let’s say you found a distributor who claims he can sell a half a million boxes of your gourmet chocolate-covered cherries to candy wholesalers throughout Japan in one quarter. Great.

Provided you interviewed the distributor carefully (refer to “50 Questions to Ask …”) and he passed all your questions with flying colors, sign him up but shorten the contract’s term to prove he can actually do what he’s promised. Give him a short leash to perform. If he can’t, when the contract expires, you are off the hook. If he performs beyond your expectations, sign him up for a two-year arrangement, possibly even on an exclusive basis. Remember, No. 1 is always the case: Hire good international counsel.

3. The sales agent is critical to your success. Typically the seller has the greatest advantage or leverage in a buyer-seller relationship. Put yourself in the shoes of a sales agent. After he’s put a lot of time, energy and money into developing an overseas market on your behalf, maybe he underestimated and realized knee-deep into the sales process that it takes more than nine months to get interest from candy wholesalers. He is right at the tipping point where buyers will start to purchase–ten months into the contract–and you fire him! Please note: A good international attorney should counsel you that you can’t terminate an agreement on short notice without good cause or without some form of compensation payout.

Obviously, this does not apply if a sales agent blatantly breaches an agreement. It really boils down to two things: First, work as best as you can with your sales agent and communicate often to see how he is coming along and, second, hire good international counsel!

4. Firing your sales agent. Be careful when, in fact, you do have to fire a sales agent, even if it is for good cause. He may be sitting on a lot of leftover inventory, which is worth a sizable investment, that needs to be transferred elsewhere. Under the circumstances, the sales agent could bad-mouth you to others in his local market causing a future lockout or ban on your products in that market. Do I dare bring this up one last time? Hire good international counsel! Your attorney should specify in the contract what can be said or done if a sales agent is fired for just cause or goes bankrupt.

Your attorney can state in the contract that the buyer cannot say or write anything harmful about you or your company no matter what happens in the buyer-seller relationship. The same goes for you. You shouldn’t be able to say anything negative about the sales agent should the contract go bust.

5. Make the first sales contract nonexclusive. The seller has more options with a nonexclusive contract. The main option is that you can sell to other sales agents and distributors in the same market, widening your distribution so you don’t put all your eggs in one territorial basket. You can adjust this later on when the buyer demonstrates sales success.

Please note, I am not attorney. The information I’ve shared is based on my experience and not on any legal advice. Don’t take my word as the word of the law. Hire good international counsel. There I go again …

Photo Credit: redtouchmedia

Note:  This webinar and interview with international trade expert Doris Nagel will also be helpful to you when establishing a sales agreement with an agent, distributor or wholesaler:  Best Practices For Setting Up a Winning Overseas Distributor Agreement.