The first overseas transaction

In my career I’ve seen companies reach a next level of growth and maturity when faced with their first real opportunity to trade overseas.

This moment may come when local objectives have been solidly and consistently met. A good time to intentionally seek international expansion.

Positive expectations prevail and the entrepreneur is personally engaged in the preparation of the first overseas order, to ensure price, quality, quantity, payment, logistics are effectively agreed, and the order is ready for delivery. These are urgent matters. As a result, operational and commercial elements of the sale are well taken care of (knowing that payment and receivables will deserve a chapter of their own in the next posts).

Entrepreneurs, however, are less present in discussions related to insurance, risk transfer, and differences of interpretation emerging from these issues, not to say post-delivery issues such as customer support, warranty, and order termination. Less time and concern spent on what legal terms apply, especially in case of a conflict. These are non-urgent matters, but equally important.

In my experience, commercial transactions always require a minimum amount of mutual trust and aligned expectations between the parties to flourish and become long lasting. However, trust may unintentionally set aside necessary clarifications about the rules and laws to apply.

Well-known Incoterms™ are useful and act as facilitators of the overseas sale, mainly to risk transfer, insurance, and logistics, lacking however all other elements of the transaction and of the product lifecycle. A pro-forma invoice or the invoice alone is not the right vehicle to ensure enough clear rules for the sale either. Lack of clarity in determining the rules that apply may lead to undesired default situations (with unknown rules and/or jurisdictions – topic to follow in next posts).

My suggestion is to understand the context of the transaction. What if the order is suddenly changed or cancelled? Will it be a one-time sale or has it the potential for development and evolution? Will it include new products in the future? Will the products require customer support, service, or maintenance? Will the purchaser be able to invest in marketing and expand sales? Has the purchaser the potential to become a preferred distributor in the country?

You and your partner will certainly benefit from an objective term sheet detailing a minimum framework for important elements of your first export transaction, which will set the stage for a potential future and long-lasting relationship.

My final take: consider your sale to a new market as the first of many, and you will be convinced you need to raise the bar in respect to a better alignment of expectations with your new overseas partner.

Know well your distributor

In my experience counselling entrepreneurs, few decisions turn out to be as regrettable as finding out that they had chosen the wrong partner overseas.

A bad choice here works significantly against the business, as it becomes so hard and costly to fix.

Differently from operational or commercial conflicts between the parties, which may emerge long time after a relationship will have started, entrepreneurs may anticipate potential legal and financial problems before contracts have been signed.

Make use of the good practice of a mini audit, which allows to identify – early in the process – important signs of distributor’s good or poor management of cash, investment, and legal compliance.

The advantage of having a non-disclosure agreement signed prior to an audit is twofold. It will provide the candidate with key business data for an informed decision (future sales, marketing investment, assets required – hence minimizing entrepreneur’s risk and liability here), and it will leverage the entrepreneur’s access to candidate’s key compliance information. Documentation may include recent balance sheets, taxpayer returns, corporate and legal documentation, quality certifications, to name a few.

The practice of an incoming audit on the potential distributor as part of the entrepreneur’s selection process will undoubtedly raise standards. Beware of a potential distributor who may not be willing to take part on this exercise and avoid presenting themselves as solid partners for the growth of your business.

As a side comment, I remain surprised to know that few companies going overseas adopt the practice of auditing their potential distribution candidates. In my experience this strategy is highly recommended and, in some instances, even required. The benefit of such practice by far outweighs its intrinsic and limited cost.

(image credits to Vidal Mayor, Fueros de Aragón, by Vidal de Canellas, 1252.)

First steps into international distribution

As counsel to entrepreneurs and business development managers, I am constantly engaged in projects related to opportunities to increase a company’s revenue, and one of them may be to identify and establish a distribution channel overseas.

Entrepreneurs and managers will agree with me that there are equally effective approaches to find the right overseas partner. These may include peer-to-peer references, specific industry research (which may include contacts with professional and sector associations), or contacts enabled by bilateral chambers of commerce.

I will elaborate on key elements of the entrepreneur’s decision to go overseas in the next posts.

In any case, first things first, I am convinced that a contractual framework is required for the first step. In my view, the process of identification of a distribution partner must necessarily start with a non-disclosure agreement with the potential partner.

A later question will come if it may be a one-way agreement or if there will be bilateral exchanges. We will touch this point soon.

The simple fact that your company decides to explore a new market is “per se” confidential information until you finally have your product or service landed on that new territory. And seldom will you not share relevant information of your business or plans with a potential partner.

The practice of signing a simple and objective non-disclosure agreement is widely acceptable in the world of business affairs, is professional and gives your business the importance it deserves. The non-disclosure agreement should precede your first conversation since you may share critical and strategic information as part of your potential partner’s investigation to accept a distribution opportunity.

My take, out of own experience, is very simple: it is never too hasty or too formal to require from your potential distribution partner to sign a non-disclosure agreement. Beware, however, of those who may be rejecting it or simply “playing it down” as ways to avoid this responsibility. Not a good signal to know that a potential partner is neglecting confidentiality, a basic element for the success of your overseas distribution business.