Many Swedish companies aim to sell products or services in the United States. The timeline for ‘when’ to do so can be based on factors such as demand, funding, staffing, existing channel contacts, the ability to localize the offerings, demographics, intellectual property (“IP”) management, branding, etc.
Let’s have a look at 8 common methods for taking product and service offerings into the United States:
- Direct sales from Sweden
- Branch Office
- Joint Venture
- Sales Representative
- IP Licensing
Direct Sales from Sweden
For many Swedish companies, the initial foray into the USA results from an American customer’s request for a product or service. Such order requests should not be treated the same as domestic transactions and should only be filled after careful consideration.Before making sales from Sweden directly into the USA, Swedish companies need to consider a number of issues, such as: when/how should the product or service be delivered (before or after payment); if there is a physical product, where should the title/risk of loss pass to the customer; how will returns and support be handled; what realistic recourse is available if the customer fails to pay; must your company register with the Internal Revenue Service given the type of deal; is there any regulatory compliance required (e.g. the Food and Drug Administration); what terms, conditions, body of law, and dispute resolution venue and mechanism will regulate the contractual relationship; how your company’s IP should be protected; whether there are any laws implied into the relationship that must be disclaimed to exclude them from the deal; immigration issues if your Swedish personnel will be required on-site in the U.S., etc.In light of this, I consider it best practice to define a U.S. business strategy (and standard contract terms) before doing any U.S. business. Here are some other methods Swedish companies use to enter the U.S.:
A branch office can be formal (i.e. pursuant to your company’s registration in the U.S. to have an office there) or inadvertent (i.e. as a result of your company’s conduct in the U.S.). Many companies are surprised to find that by hiring a consultant in the U.S. to assist with lead generation and deals, the company may inadvertently create a business presence in the U.S.Generally speaking, Swedish companies do not intentionally form U.S. branch offices given U.S. branch offices are not treated as a separate legal entity and therefore unreasonably expose the Swedish parent company to U.S. legal and tax liabilities.
A subsidiary is a separate U.S. legal entity (a corporation or limited liability company) owned directly or indirectly by the Swedish parent company. Subsidiaries are often considered desirable given a subsidiary generally insulates the parent company from liabilities caused by the subsidiary in the foreign country. Further, the business of a subsidiary, if conducted properly, can ensure the parent company is not subject to U.S. and/or state taxes. In such cases, only the subsidiary will be required to report/pay such taxes.
Another advantage of a subsidiary is the parent company will have a physical presence in the U.S., increasing brand awareness and credibility of supply in the U.S. Moreover, if the U.S. government will be a potential customer for your products, having a U.S. presence may promote sales given the ‘Buy America Act’ (41 U.S.C. §§ 10(a) – (d)).
In the event a subsidiary is formed, the parent company will generally designate the subsidiary as either a sales representative (discussed below) or a distributor (discussed below). In both cases, care must be used in ensuring the relationship between the different entities does not create or give the impression of the parent company itself doing business on the U.S. market.
A joint venture is generally a legal entity owned, in part, by the Swedish parent company but also by one or more other owners. Joint ventures are often created for a specific duration of time after which the parent company can buy out the other owner(s) interests based on a metric in the joint venture agreement which typically relates to some pre-defined multiple on the revenue levels and/or EBITDA achieved by the joint venture.Joint ventures, if constructed properly, must take into consideration a range of factors, such as, each owner’s contribution, each party’s right to payments during the lifetime of the joint venture, how board and shareholder decisions shall be made, 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 U.S. market.
Sales Representative (“Sales Rep”)
A sales rep (often referred to as an agent in Sweden) is generally a marketing-and-sales support arm in the U.S. A sales rep does not purchase products from a Swedish supplier but rather works as an intermediary to connect Swedish suppliers with American customers in exchange for a commission. A sales rep can be exclusive or non-exclusive and the sales rep’s rights will typically be limited to a specific geographic territory—i.e. that portion of the U.S. the sales rep can reasonably cover.Typical pitfalls with this method result from a supplier too heavily controlling the sales rep—so much that the Internal Revenue Service deems the sales rep to be the supplier’s employee thereby subjecting the parent company to employee tax issues as well as potential income tax exposure in the U.S. Additionally, under some circumstances where the sales rep actively negotiates with U.S. customers or accepts orders directly, a U.S. court may similarly find the sales rep’s conduct is tantamount to the Swedish parent company having a U.S. business presence.
A distributor scenario involves a U.S. distributor purchasing products from the Swedish supplier for resale of such products to customers within the U.S. and for a profit. Typically, distributors have full control over resale prices to U.S. customers. A distributor can be exclusive or non-exclusive and the distributor’s rights will typically be limited to a specific geographic territory again, as in the case of the sales rep, based upon the distributor’s ability to reasonably cover and service the territory. Any exclusive appointment of a U.S. distributor should be 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. At times, merely having the right to convert exclusive rights to non-exclusive rights will be insufficient as this prevents the Swedish supplier from appointing an alternative distributor ‘exclusive’ rights which will likely be a prerequisite for qualified distributors.
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 U.S. 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.
Franchises may be regulated by state agencies/laws given that franchisees often invest substantial amounts of money in such businesses and states deem the protection of such franchisees (against terminations of rights without cause) as a public policy issue. Moreover, franchises may be regulated like investments and investors (i.e. franchisees) may, depending upon the state jurisdiction, be required to receive substantial detailed and accurate information prior to entering into the franchise agreement or the franchisor may be exposed to liabilities.
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 U.S. prior to licensing any such rights to a U.S. party.
To understand the concept of IP licensing, let’s take the example of a Swedish medical device company owning patents to a surgical instrument. The Swedish company can manufacture the instruments itself and ship the same to the U.S. (for instance, to, as discussed above, its Subsidiary, a third party sales rep, a third party distributor or even directly to a foreign customer—provided applicable laws and regulations are respected). Alternatively, the Swedish company may grant a patent license to a U.S. company whereby the U.S. 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 U.S.
In this scenario, the U.S. patent licensee will generally pay a royalty to the Swedish 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 labeling 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 the U.S. market should be informed and strategic. Such methods can be direct or can involve one or more intermediaries. The key issues that must be prioritized are the safeguarding of any and all IP, the mitigation of U.S. 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.
And here’s what a recent Swedish client, entering the U.S. market, had to say about B2World:
“OssDsign AB is a Swedish med-tech company emerging from academic research by Clinical Researchers at Karolinska Hospital and Biomaterial Researchers at Uppsala University. OssDsign has developed a unique technology for 3-D printed, patient specific, bioactive implants addressing clinical complications related to traditional implant technologies. Key to OssDsign’s business objectives is a successful rollout in the U.S.—currently slated for 2017. B2World has been instrumental in the strategic work defining the market entry strategy, identifying/managing potential risks, and developing partner contracts. B2World’s in-depth understanding of the U.S. market combined with a motivation to understand our business and the specific challenges of a start-up with high ambitions added substantial value in our planning for the U.S. market introduction and OssDsign’s future success.”
2017, Anders Lundqvist, CEO OssDsign AB
Thank you for reading the article!
B2World aims to simplify companies’ efforts to do business in the U.S. and other foreign markets. Have a look at our extensive list of testimonials at http://www.b2world.com/testimonial-portfolio/. Also, feel free to contact the author, Gary Guttenberg at [email protected] or +46(0)70 752 16 80.
*This article is not legal advice and is provided for general information purposes only.