• Orr Litchfield, english
  • Orr Litchfield, dansk
  • Orr Litchfield, polski
  • Orr Litchfield, deutsch
  •       Wednesday, 19 December 2018   

    Entering new markets – Key legal & commercial issues

    Overview

    There are numerous reasons why businesses seek to enter new markets, whether those markets are within their own country or overseas. In general, companies usually go international because they want to grow or expand their operations. Typical motives include generating more revenue, competing for new sales, investment opportunities, diversifying, reducing costs and recruiting new talent.

    When you are entering a new overseas market, it is likely that the process will be more complicated than expanding in your own country as you will not only need to deal with the laws, regulations, customs and practices of at least 2 jurisdictions but also the practical issues of exporting and international supply chain management.

    When you decide to enter a new overseas market, it is important that you identify the best approach for you and your business. Ultimately, every business is unique, every business owner is unique, the majority of products are unique in one way or another and each new market, which you seek to enter, will have its own unique set of customs, practices, laws and regulations.

    In general terms, there are 6 alternative business methods of selling products to customers in overseas markets. Each alternative method can be divided into sub-categories depending, primarily, on the duties and responsibilities allocated to different parties. We have summarised each of these alternatives below, together with some of their respective advantages and disadvantages. You may find that you need to use more than one strategy, when you enter a new market, depending on numerous factors including the nature of the market that you target and the products that you offer. 

    1. Direct selling – In terms of format, this is the simplest and least expensive method of entering a new market in terms of direct costs. The supplier simply sells its goods to customers in the new market in a similar way to selling goods to its customers in its existing market.

    Depending on the nature of the goods, direct selling is likely to involve significant additional administrative resources as there is a great deal more to exporting than simply generating overseas sales. These administrative resources are likely to include customs and other paperwork, shipping, warehousing and after-sales service. Selling direct also typically involves dealing with marketing in the new overseas market and making periodic sales visits to the country, supplemented by telephone sales or accepting overseas orders on an e-commerce website. It can be a simple and cost-effective way to enter an overseas market. However, it may isolate you from your customers, and make you unable to share the exporting workload with partners or intermediaries.

    You should ensure that you take legal advice and fully understand the legal risks of trading in an overseas market. It would be advisable to review your terms and conditions of trading (for example, dispute resolution, jurisdiction and governing law provisions) and consider establishing a special purpose trading vehicle for the relevant market in order to try to ring-fence some of the risks.

    Primary advantages of direct selling: Simplest business structure, significant product control, significant brand control, limited professional costs, no revenue sharing with third party, cheap to set-up.

    Primary disadvantages of direct selling: Low market knowledge, likely slower market penetration, lower (or perceived lower) customer support, customer liability risks, significant additional administrative responsibilities, significant additional financial risks (for example, export-related risks, such as exchange-rate movements, non-payment risks, trading cycles and delays due to documentation problems). 

    2. Agency - An agent is an intermediary involved in the making of a contract between a supplier (who is the principal of the agent) and the supplier’s customer. There are several types of agent but, where goods are being sold, the two most common types of agent are a sales agent and a marketing agent. A sales agent has the authority to enter into agreements with the customer on the supplier’s behalf.  A marketing agent simply markets and promotes the supplier’s products to prospective customers but, unlike a sales agent, does not have authority to bind the supplier. When a customer wishes to make a purchase it is the supplier who completes the contract.

    Agents are usually paid commission on any sales to customers. Where the agent is responsible for collecting payments, it may simply retain the commission that is due to the agent and transfer the balance to the supplier. In the European Union, certain categories of agent are protected from abusive business tactics by law and have rights which may be considered similar to those of an employee. It is important that you understand the legal ramifications of appointing an agent in the relevant market.

    You should ensure that you take legal advice, fully understand what you are agreeing and enter into a properly prepared agency agreement before you start using the services of the agent.

    Primary advantages of agency: Relatively simple business structure, agent should have significant market knowledge, agent on commission incentivised to make sales, likely faster market penetration than direct sales, significant product control, reasonable brand control, limited professional costs, relatively cheap to set-up.

    Primary disadvantages of agency: Revenue sharing with agent, potential loss of market and brand control where agent has exclusivity, comparatively low (or perceived low) customer support, customer liability risks, significant additional administrative responsibilities, significant additional financial risks (for example, export-related risks, such as exchange-rate movements, non-payment risks, trading cycles and delays due to documentation problems). 

    3. Distribution - In a typical distribution arrangement, a supplier of goods sells its goods to a distributor at a discount. The supplier may be a manufacturer or may itself be a distributor reselling another supplier’s goods. The distributor will then sell the goods to customers at a profit. There may be limits as to what, how, when and where the distributor may sell the goods. A distributor may have exclusive, sole or non-exclusive rights to sell the supplier’s products in the new market. In some countries, certain categories of distributors are protected from abusive business tactics by law and have rights which may be considered similar to those of an agent. It is important that you understand the legal ramifications of appointing a distributor in the relevant market.

    You should ensure that you take legal advice, fully understand what you are agreeing and enter into a properly prepared distribution agreement before you start using the services of the distributor.

    Primary advantages of distribution: Relatively simple business structure, distributor should have significant market knowledge, distributor purchases products from supplier, outsourcing of administrative responsibilities to distributor, transfer of additional financial risks to distributor (for example, export-related risks, such as exchange-rate movements, non-payment risks, trading cycles and delays due to documentation problems), low indirect costs, distributor makes profit on sales, likely faster market penetration than direct sales, potential for better customer support (where distributor receives training), significantly reduced customer liability risks, limited professional costs, relatively cheap to set-up .

    Primary disadvantages of distribution: Indirectly sharing revenue with distributor, significant loss of market and brand control to distributor (particularly where distributor has exclusivity), potentially comparatively low (or perceived low) customer support. 

    4. Establishing an overseas operation – A supplier may choose to open its own branch or subsidiary in the new market. It is more common to establish a subsidiary as this will usually have limited liability and, consequently, limit the risk of the supplier.

    You should ensure that you take legal advice and fully understand the legal ramifications of establishing your overseas operation before you set it up.

    Having a presence on the ground can be valuable, but setting it up and maintaining it may involve major resource commitments.

    Primary advantages of an overseas operation: Mid-range complexity in business structure, high product control, high brand control, mid-range market penetration (but scope for rapid growth), high (or perceived high) customer support, mid-range customer liability risks (as primarily limited to overseas entity), no revenue sharing with third party, mid-range set-up costs , mid-range professional costs, limited professional costs .

    Primary disadvantages of an overseas operation: Potentially limited initial market knowledge (but scope for rapid growth), high level of administrative responsibilities, high level of additional financial risks (for example, export-related risks, such as exchange-rate movements, non-payment risks, trading cycles and delays due to documentation problems), high customer liability risks (although the majority may be ring-fenced in the overseas subsidiary), establishment costs, potentially high medium and long-term running costs. 

    5. Establishing a joint venture - Suppliers often enter into a joint venture with a local business as a hybrid between establishing their own wholly owned operation and entering into a distribution agreement. A joint venture can be set up using a variety of different structures, for example, by way of simple contractual arrangement, a partnership, limited liability partnership or limited company. However, the latter is the most common.

    Joint ventures often require a significant level of legal and other professional services work. You should ensure that you take legal advice, fully understand what you are agreeing and enter into a properly prepared joint venture agreement (and related documentation) before you start using the joint venture entity.

    Primary advantages of a joint venture: joint venture partner should have significant market knowledge, high product control, high brand control, high market penetration, high (or perceived high) customer support, mid-range customer liability risks (as primarily limited to overseas entity).

    Primary disadvantages of a joint venture: High complexity in business structure, revenue sharing with joint venture partner, high level of administrative responsibilities (but shared with joint venture partner) , high level of additional financial risks (for example, export-related risks, such as exchange-rate movements, non-payment risks, trading cycles and delays due to documentation problems) (but shared with joint venture partner), potentially high medium and long-term running costs, high professional costs, high set-up costs. 

    6. Acquisition – Suppliers may seek to enter a new market or expand in a new market by acquiring a local competitor or an entity which can assist them with sales, marketing or supply chain issues.

    Acquisitions usually require a significant level of legal and other professional services work. You should ensure that you take legal advice, fully understand what you are agreeing and enter into a properly prepared acquisition agreement (and related documentation).

    Primary advantages of acquisition: No revenue sharing with third party, the target company should have significant market knowledge, high product control, high brand control, high market penetration, high (or perceived high) customer support.

    Primary disadvantages of acquisition: High complexity in business structure, high level of administrative responsibilities, high level of additional financial risks (for example, export-related risks, such as exchange-rate movements, non-payment risks, trading cycles and delays due to documentation problems), high customer liability risks (although primarily limited to overseas entity), potentially high medium and long-term running costs, high professional costs, high set-up costs.

    Conclusion

    Ultimately every decision to enter a new overseas market and determining the best approach for you and your business is based on individual circumstances. You may decide that a mix of the alternative approaches is best for your business (for example, appointing a sole agent or distributor whilst also making direct sales yourself) or your strategy may be to start with one method before adopting another method once certain goals have been achieved (for example, starting with direct sales before appointing an agent or distributor and finally establishing your own overseas operation by acquisition or otherwise). There is no 'one size fits all' solution.  However, the earlier you create your strategy and more thoroughly you prepare and carry out your due diligence, the better your chances are of making your strategy work. In order to maximise your return, you need to be in control of the process from start to finish, which requires detailed thought, preparation and planning. Determining your objectives and setting your goals early on when seeking to enter a new market and creating a viable plan and reviewing and revising it regularly means that you will maximise your chances of being ready to take advantage of any good opportunity to develop your business when it arises.

    Need to talk? 

    Whatever stage of the process you have reached, we can help you to understand the different legal and related commercial issues when entering a new market, to choose the option that is right for you and to help you develop your business.

    Contact us

    If you would like more information about selling businesses or would like to discuss a potential or existing transaction, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com

     

     

    Back to News Home

     

    News & Information

    Register for news updates
    Client Enquiries
    Orr Litchfield, Havnegade 41, 1., 1058 København K, Copenhagen, Denmark