Many emerging companies desire to eventually sell products and/or services into foreign markets. The timeline for ‘when’ to do so can be based on a broad range of factors such as funding, existing channel contacts abroad, the ability to localize the offerings, demographics, intellectual property (“IP”) management, branding, etc.
With this said, there are 8 common methods companies choose from in taking product and service offerings into foreign markets:
- Direct sales from the home country
- Branch Office
- Joint Venture
- IP Licensing
Let’s take a closer look at each of the foregoing alternatives:
- Direct SalesFor many companies, the initial foray abroad results from a foreign customer’s product or service request. Typically, such inquiries are handled much like a domestic transaction with little, if any, thought of legal consequences, branding concerns, tax implications, and any other business exposures. This approach can prove counterproductive.
In order to make sales from a home country directly into a foreign market, there are numerous issues to consider, such as, when should the product or service be delivered (before or after payment), what recourse is available if the customer fails to pay, must your company register with the tax authority in the foreign customer’s jurisdiction, what terms, conditions, body of law, and dispute resolution venue and mechanism will regulate the relationship, how is your company’s IP protected, are there any laws implied into the relationship that must be explicitly disclaimed in order to exclude them from the deal, etc.
In light of this, it is advisable to consult with external foreign market entry specialists before selling products or services directly into a foreign market.
- Branch OfficeA branch office can be formal (i.e. pursuant to your company’s registration with a foreign government to have an office there) or informal (i.e. as a result of your company’s conduct in a foreign market). Many companies are surprised to find that by hiring a consultant in a foreign country to assist with lead generation and deals, the company may have inadvertently created a business presence in the foreign country (such as a branch office or agent). Competent drafting of the terms of such a consultancy relationship will remove such a risk.
Generally speaking, companies do not knowingly form branch offices given branch offices are not a separate legal entity and therefore provide no insulation from legal liabilities on the foreign market. As such, the company will often be directly exposed to liabilities for the conduct of the branch office.
A subsidiary is a separate legal entity formed in the foreign country. Subsidiaries can be deemed desirable given that a subsidiary will generally insulate the parent company from liabilities caused by the subsidiary in the foreign country. Further, the business of a subsidiary, if conducted properly, can ensure that the parent company is not itself subject to taxes in the foreign jurisdiction. In such cases, only the subsidiary will be required to report/pay taxes in the foreign country.Another advantage of a subsidiary is that the parent company will have a physical presence on the foreign market which substantially increases brand awareness as well as credibility of supply in the foreign market. Further, the parent company will be able to exert influence and control over its own subsidiary.
- Joint VentureA joint venture is generally a legal entity owned, in part, by the parent company but also by one or more other investors. Joint ventures are often created for a specific duration of time after which the parent company can buy out the other investors’ interests based on a metric in the joint venture agreement which typically relates to some pre-defined multiple on the revenue levels achieved by the joint venture.
Joint ventures, if constructed properly, must take into consideration a range of factors, such as, each party’s contribution, each party’s right to payments during the lifetime of the joint venture, how board and shareholder decisions shall be conducted, whether or not any owner can sell its ownership interest to a third party, ownership of any IP created by the joint venture, non-competition undertakings, etc.
In light of the foregoing, many companies often elect not to form a joint venture but to select another method of entering into the designated foreign market.
- AgentAn agent is generally a marketing and sales support arm in the foreign market. An agent does not purchase products from a supplier but rather works as an intermediary to connect suppliers and foreign customers in exchange for a commission. An agent can be exclusive or non-exclusive and the agent’s rights will typically be limited to a specific geographic territory.
Typical pitfalls within this method can result from a supplier too heavily controlling a foreign agent—so much that the foreign tax authority deems the agent to be the supplier’s employee thereby creating employee tax issues as
well as potential income tax exposure in the foreign market. Another drawback can be that in some countries (e.g. within the European Union), a company may have a difficult time terminating an agent’s appointment without first paying the agent damages and giving some ‘reasonable’ notice period of such termination.
A distributor scenario involves a foreign distributor purchasing products from the supplier for resale of such products to customers within the foreign jurisdiction and for a profit. Typically, distributors have full control over resale prices to customers. A distributor can be exclusive or non-exclusive and the distributor’s rights will typically be limited to a specific geographic territory. Any exclusive appointment of a distributor should be very carefully drafted and subject to sales targets being achieved. If such targets are not achieved, your company should have the right, at its sole and absolute discretion, to either terminate the agreement in its entirety or convert the exclusive rights to non-exclusive rights.
A franchise is, in essence, a distribution arrangement with a few additional attributes. Firstly, the supplier provides some business method for carrying out the business in the foreign jurisdiction. Next, the supplier’s trademark (i.e. brand) is licensed to the franchisee. McDonald’s is a common example as almost everyone has been to a McDonald’s and further understands that each McDonald’s complies with a rather comprehensive manual of how to conduct business and such franchises are furthermore required to operate under the McDonald’s trademark. Finally, very often there is a franchise or trademark fee distinct from the other fees payable to the franchisor.In many countries, franchises are regulated by local agencies given that franchisees may invest substantial amounts of money in such businesses and local communities deem the protection of such franchisees (against terminations of rights without cause) as a public policy issue. Moreover, in some countries, franchises are regulated like investments and investors (i.e. franchisees) must receive substantial detailed and accurate information prior to entering into the franchise agreement or the franchisor may be exposed to liabilities.
- IP Licensing
IP (“intellectual property”) refers primarily to patents, trade secrets, copyrights, and trademarks. All of the foregoing IP can be licensed. With this said, it is advisable to ensure your company has registered or recognized IP rights in the foreign country prior to licensing any such rights to a third party. To understand the concept of IP licensing, let’s take the example of a German medical device company owning patents to a surgical instrument. The German company can manufacture the instruments itself and ship the same to foreign markets (for instance, to, as discussed above, its Subsidiary, a third party agent, a third party distributor or even directly to a foreign customer—provided applicable laws and regulations are respected). Alternatively, the German company may grant a patent license to a foreign company whereby the foreign company can manufacture the instruments itself (locally or perhaps in another country provided the patent license permits the same) and then sell the manufactured instruments in the foreign country.In this scenario, a patent licensee will generally pay a royalty to the patent licensor and such royalty will accrue on a per-unit basis, for instance when each instrument unit is manufactured, shipped or sold. The instruments may or may not be sold under the patent owner’s product name—all depending upon whether or not the patent license permits private labelling of the instruments. With this said, patent owners will want to ensure strict compliance with all design specifications in producing such instruments—in order to ensure of product quality especially in those cases when the patent owner’s product or company name will be associated with the instruments produced by the foreign patent licensee.
As mentioned, the method your company chooses to reach a foreign customer base may be direct or can involve many intermediaries. The key issues that must be prioritized are the safeguarding of any and all IP, the mitigation of foreign tax and legal exposure, ensuring that incoming payment obligations are clearly defined and can be reasonably enforced, administrative ease, and that such approach fits within your company’s global roadmap for business development. B2World aims to simplify companies selection / implementation efforts with respect to foreign market entry. Feel free to Contact Us to learn more about how we can help you. The world awaits!
*This article is not legal advice and is provided for general information purposes only.