Assessing Control, Freedom & Exploring Risks for New Business Markets
For an entrepreneur, expanding one’s corporation to other states or countries may be challenging because of differing laws and corporate cultures. An entrepreneur may identify desirable growth areas, but logistical issues such as lack of contact with potential customers, not understanding the local laws, and the inability to identify consumers’ preferences could complicate the decision to open a new market.
Generally, it is easier to expand economic activities abroad if a representative native to the country of interest can physically represent the company´s interests overseas.
Sometimes, it may be beneficial to reduce an initial profit by hiring an onsite representative in the new business zone. In practice, the long-term benefits do not diminish by increasing costs and sharing profits. The representative’s local networking abilities, legal knowledge, and understanding of operating requirements tends to expand business possibilities in the new territory, thus reducing initial costs.
An entrepreneur could attain a partner through a joint venture or incorporate a subsidiary to run the operations in the expanded territory, joining with a third party.
If third-party inclusion is personally undesirable, an entrepreneur can hire a representative, which often achieves better results and multiplies contracts in the expansion zone. The two basic legal structures for these representatives are agency contracts and distributor contracts.
Both contracts provide expansion opportunities, with different levels of third-party independence.
- Agency Contracts:
In agency contracts, the company hires a local individual, who generates new business in a previously unused territory.
The agent is an employee of the corporation, usually with an exclusive territory, that earns commission through the general amount of profit that the company generates.
An important characteristic of an agency representative is that the agent does not profit from goods. Instead, the agent arranges sales deals for the manufacturer. The agent facilitates business and protects the company’s interests.
- Distributor contracts:
Distributor contracts, on the other hand, have more manufacturer independence. Agents buy goods from manufacturers directly, reselling the goods at their own cost and risk.
The profits for the distributor are determined by the difference of the goods’ buying price and resale price. In very specific cases, the manufacturer could intervene in the price-fixing process. However, the common rule in antitrust matters is that any price fixing between the distributor and the manufacturer violates antitrust statutes.
The following blogs discuss main points that entrepreneurs, looking to expand businesses nationally and internationally, should consider when deciding between agency contracts and distributor contracts.
- Agency Contracts
- Distributor Contracts
- Representing a Corporation Through an Agent or a Distributor
- Obligations of Parties in Agency Contracts: the Company
- Obligations of Parties in Agency Contracts: the Agent
- Restriction Clauses on Agency and Distributor Contracts
- Agency and Distributor Contracts and Competition Laws in the US
Conclusion
Some innovative business strategies that an entrepreneur can consider in order to increase profits are not only based in business administration logic, but also in law, as a practical tool for expanding business. These articles are informative and thought-provoking for those deciding the best way to explore new markets.
Both of the contracts discussed are basic methods used to increase a company’s profit and expand the regions where a company can legally conduct business. Without major investments, a company can attract the right representatives in a desired trading region.
While this is a broad and complicated subject, these articles focused on some of the main aspects that a businessperson may consider before deciding between agency and distributor contracts. From taxation to special rights conceded by the specific jurisdictions at the termination of agency and distributor agreements, to opening a branch or subsidiary abroad, an entrepreneur should consider the best way to minimize risk and maximize profit.
Both agency and distributor contracts have unique advantages, and the manufacturer must decide between two differing values, control over independence.
If a company opts for control, an agency contract may better meet the company’s needs. However, an agency contract could legally bind the company to foreign tax obligations or in legal battles with the agent over contract disputes. The manufacturer conducts transactions, including exporting products, collecting necessary disbursements, and loss absorption if the end product does not perform as expected.
If a company opts for a representative with more freedom and less supervision, the distributor agreement could be a better choice. However, the company is still responsible for product liability.
In this case, two particular aspects of the distributor contract should be considered.
Any improvements done by the distributor should be communicated to the manufacturer to ensure that these product design changes fall within the distributor’s contract-approved responsibilities and scope. In the distributor contract, the manufacturer may have forbid product modification.
The manufacturer must also ensure that the distributor does not use the company’s trademarks, controlling any negative consequences affecting the company resulting from a distributor’s error.