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Agent Agreement to Manufacture Overseas

Agents and Distributors

General Info provided by AUST Govt

Most Australian firms rely on agents or distributors to represent their business in international markets.

There is often confusion about the roles of agents and distributors, so it is important to understand the difference between the two before you enter into any discussions.

The definition and responsibilities of agents and distributors can also vary depending on the country or industry, so when dealing with prospective overseas representatives it is essential that you always confirm their specific roles and responsibilities.

This is general information and the actual role your partner undertakes will also depend on the individual agreement you have with them, so it’s important to confirm the details in a contract and not assume they will take on all activities an agent or distributor may generally undertake.

The role of an agent vs distributor

Role of the Agent

Agents do not take ownership of goods but act as a representative of the supplier. They are also engaged by exporters of services to represent them in overseas markets.

An agent is generally paid by the exporter based on a commission of sales value generated. The exporter receives orders for customers from the agent but then delivers goods or services directly to customers, invoices the customers, and collects payments from the customers. The exporter is also responsible for setting the selling price, although the agent will likely provide input on local market conditions to help the exporter decide on pricing.

Agents are generally based in the export market and often represent several complementary product or service lines. They may operate on an exclusive basis, as the sole agent for a company’s goods or services in a specific export market, or as one of a number of agents for the exporter in that market –that is, on a non-exclusive basis. See ‘About Agents’ below for more on roles, choosing the right one, and the pros and cons of using this representation model.

Advantages

There are many advantages in doing business through an agent. Here are some of them:

• You have control over branding, marketing and pricing.
• Commission only-based agent agreements can be a good incentive for higher sales volumes for your products.
• Agents tend to have smaller product ranges than distributors, which means that they can provide more focus on your products.

Disadvantages

Working through an agent can also have disadvantages:

• A sales agent may have fewer resources than a distributor.
• Working on a commission basis can mean that the agent is less committed to your success.
• Significant overseas marketing and management support is required for a successful agent/client relationship. More effort is required from your business, such as fulfilling orders directly to customers and obtaining payment.
• Close attention is required to monitor the effectiveness of the agent.
• A poor agent can not only ruin your opportunities in the market but also undermine your marketing efforts and reputation.
• Working through agents (as opposed to distributors) provides less protection from risk of non-payment, currency fluctuations, product rejections, warranty claims, etc.
• You risk losing market share if your agent is poached by a competitor.

Role of the Distributor

A distributor buys goods – that is, the distributor ‘takes title’ of the goods – and then resells the goods to local end users who may be retailers or consumers. In some cases, the distributor may sell to other wholesalers who then sell to local retailers or end users.

Distributors may carry complementary and competing lines and usually offer after-sales service.

Distributors are paid fees by adding a margin to products, and their fees are higher than those of agents because they usually carry inventory, extend credit for customers, and are responsible for marketing.

Because a distributor has more responsibilities in selling your product in market than an agent, they require a higher margin. This may impact on how you price your product; you will probably need to absorb the distributor margin otherwise your pricing to the end customer will be too high. Some exporters find that they are unable to use a distributor as their profit margin is too small to provide enough margin for the distributor and a competitive price for end users.

See ‘About Distributors’ below for more on roles, choosing the right one, and the pros and cons of using this representation model.

Advantages

• The exporter has one large customer who supplies many smaller end customers in the market.
• The exporter maintains some control over distribution.
• The distributor provides back-up service to clients.
• The distributor holds stock in the market to reduce order lead time for customers.
• The distributor helps pay for and undertake marketing and promotion of your product in the market.
• The distributor develops a customer base for your product.
• The distributor handles more of the in-market work, saving you both time and costs.
• In-market risks are largely carried by the distributor.
• The distributor may provide warranty and product services.

Disadvantages

• You have no control over the selling process.
• The costs of selling through a distributor can force the product out of market competition: for example, a distributor may add up to a 50 per cent mark-up, or more, on your product before it reaches a retailer.
• The distributor and sales staff will be less knowledgeable about your products than your own people.
• You can become removed from the market and not have firsthand knowledge of conditions.
• You may not know who your customers are.
• Because a distributor shares responsibility for marketing and promotion, you may not retain total control over the branding of your product.
• If the distributor is a wholesaler rather than a specialised master distributor, they may not sell as effectively as other wholesalers.
• The distributor may not have the sales force for new product introductions in larger markets.
• The distributor may represent multiple products, so attention and time may be divided away from your product.
• Sales-rights to your product are a valuable ‘right’ and should not be surrendered without a full analysis of the available options.
• Your distributor may be difficult to ‘disengage’ if you are unhappy with their service.

Exclusivity versus non-exclusivity

Appointing an agent or distributor on an exclusive basis – where they have sole rights to sell your product within a defined territory – allows the agent or distributor to build their business free of competition in that territory.

Many agents and distributors want exclusivity as they will invest effort and financial resources into building brand awareness to create a market for your product. The stronger the brand reputation, the more valuable an exclusive arrangement will be.

It is a good idea to think through the issue of exclusivity versus non-exclusivity before entering into negotiations with potential partners. If you intend to agree to an exclusive arrangement, performance measures will need to be established, as well as a termination clause within the agreement in the event of non-performance.

Choosing an agent or distributor

The most important factor in choosing an agent or distributor is that you can establish a close working relationship. You have to be able to build high levels of trust and communicate regularly. Business is much easier to transact if your enjoy working with each other.

Before choosing an overseas partner you should undertake a rigorous research process and speak with a range of potential agents or distributors – perhaps four or five – before narrowing the list

Before making a final decision ask your potential partner for trade references, and also consider using a professional credit checking agency to confirm the potential partner’s financial stability.

It is also important that you meet the potential partners in their own market rather than in Australia. They should show you the market firsthand, which will not only give you a feel for how well they know the market, but also give you a chance to get to know them better as a person.

Exporters who rely only on email communication with overseas partners often have misunderstandings leading to problematic relationships. While email is ideal for confirming discussions, meeting in person or even using the telephone or Skype in the early stages can go a long way towards reducing misunderstandings.

Remember that you are relying on your representative’s local knowledge and contacts to win business in the market, so make sure that the relationship is real. You may need to meet several times to build a relationship and work through the fundamentals of how you will work together and what should be included in an agreement.

Before drafting an agreement you should be in accord as to who does what; then you should engage legal advice in order to have an agreement drawn up. Drafting agreements and making changes when two parties have differing views on core issues can be a waste of time and money, so it is wiser to agree on the big issues first, then start the legal work.

Knowledge of the market

Your chosen representative should have a thorough understanding of competitive products and prices to assist in product modification, advertising requirements, or changes.

• Does this representative have a good network and good contacts?
• How many years’ experience does this representative have in your market sector? You may opt for a company that is established and has a good network of contacts but may not be particularly flexible or open to change. Or you may prefer to appoint a young, energetic company that is out to prove itself and is flexible and innovative but does not offer extensive experience or contacts.
• Does this representative have good knowledge of the local market? Good representatives should be able to assist you in your marketing program and give you the benefit of their local market knowledge.

Tips to remember when working with an agent

• Schedule regular market visits.
• Schedule regular training for them on your range.
• Have a timetable for regular performance reviews.
• Set realistic performance standards and revise regularly when market conditions change.
• Have a clear termination procedure.
• Exporters can rely too heavily on their agent for useful feedback and relevant information. Make sure you check local conditions and market feedback yourself.

One way to clarify your thoughts when you come to choosing an agent or a distributor is to develop an ideal partner profile and compare candidates against a standard set of criteria.

The agent or distributor should have a good understanding of the market, so look carefully at their current customers, contacts, networks and place in your target market.

Here are some suggestions on the type of questions you could ask prospective agents:

• • To check stability, try to find out their history with other customersWhat are your financial resources? What is your credit rating? (There are credit agencies that can provide a report on potential partner credit ratings.)
  • To check their relevant product or service knowledge ask:Do you have experience with similar (product) lines? What are your marketing and service strengths?
  • To check their management capability – ask:

How long have you been an agent or a distributor? What are some of your successes with other clients? For distributors ask about their strengths in marketing and customer service?

• • To check their compatibility with your company – ask:

What is the size of your business? What systems do you use? How many staff do you have? How do you choose your staff? What experience did your staff members have before you employed them? How are they qualified for this work? Have you worked with any other Australian companies? If so, which ones, and for how long? What languages do you [the head of the company] speak?

• • To check an agent’s product or service mix – ask:

What do you like about my product or service? Do you represent any companies with products or services which conflict with mine? What are your sales projections for my products or services – and why? (Ascertain that these sales projections are realistic)

• • To check whether their distribution network is what you need – ask:

What is your geographical coverage? How often do you personally get to each of the markets indicated? Do you have staff in place in each of these markets? Have you ever faced political trouble in the markets you cover? If so, what was the result? Have you ever been forced out of a market? If so, why?

• • To check their sales capability and marketing policies – ask:

Can you give me examples of your sales capability? What marketing policies do you use? What incentives do you give your staff? How are your staff trained and supervised?

• • To check their promotional expertise – ask:

What is your approach with marketing budgets? What experience have you had in handling marketing budgets? If called upon, how do you deal with the media in the markets you cover? What experience have you had in dealing with the media? How do you deal with the media in markets where you don’t speak the language? (If applicable.)

• • To check their ease of location and facilities – ask:

Where and what facilities do you have for customer access? Where is your warehouse? How large is it? How is it protected? What services do you provide for your customers from your warehouse

Points to consider when entering into an agency or distributor agreement

An agent or distribution agreement is a legal document, even if it is a verbal agreement. Austrade recommends that you document the agreement in a written contract and seek advice from a legal professional with international contract experience prior to signing anything.

Your agreement should set out all the terms and conditions of the agent/supplier relationship, with no ambiguities or areas that are unclear.

Before drafting an agreement, you should agree exactly who does what within the agent/supplier relationship.

Again, it is then imperative to engage legal advice when having the agreement drawn up.

Drafting agreements and making changes when two parties have differing views on core issues can be a waste of time and money. It is wiser to agree on the big issues first, then start the detailed work of the actual contract.

The key issues you should discuss with your potential agent and agree at a high level before entering into a legal agreement could include:

• The product range.
• What you, the exporter (supplier), will provide: for example, printed brochures, price list, new product briefings, product training, and so forth.
• Supply of samples: at what price, who pays for their cost and freight, the length of time samples will be available, and the process and payment for their return.
• The territory covered: the geographical area and market segment.
• How the goods will be supplied.
• How online sales in the territory will be managed.
• Commission: the amount and the conditions.
• Reporting: monthly or quarterly, and the content of the reports
• Communications: how the timeliness of communications on major issues will be dealt with. For example – delivery delays or major customer issues.
• Brand management: you can set some controls over the use of your brand.
• Ownership of trademarks and intellectual property.

One of the difficulties exporters are confronted with when drawing up contracts is the lack of uniform regulations around the world. This means that parties must refer primarily to the rules set out in their agreements, which in turn makes the careful drafting of such contracts absolutely vital.

Most exporters will be faced with drafting an international distributorship agreement. The ICC Model Distributorship Contract provides a uniform contractual framework that incorporates the prevailing practice of international trade.

Almost all companies engaged in international trade work with some distributors overseas. Here are some important points to remember in dealing with distributor:

• Select your distributors – don’t let the distributors select you.
• Look for distributors capable of developing your markets, not just selling your products.
• The skills, qualities and network which each distributor can bring to your relationship may be different – make sure you discuss your expectations so that these are clearly understood.
• Never assume a distributor will undertake a task without discussing it first.
• Set clear performance criteria in your distributor’s agreement and monitor these closely.
• Get to know the distributor well before signing an agreement.

Disclaimer

Austrade does not endorse or guarantee the performance or suitability of any introduced party or liability for the accuracy or usefulness of any information contained in this Report. Please use commercial discretion to assess the suitability of any business introduction or goods and services offered when assessing your business needs. Austrade does not accept liability for any loss associated with the use of any information and any reliance is entirely at the users’ discretion.

Why You Need To Know About Foreign Bribery and its Implications:

Bribing, attempting to bribe or facilitating bribery of a foreign public official is a serious crime and amendment to the Australian Criminal Code in 1999 makes acts of this nature overseas punishable in Australia. Companies can also be held criminally responsible for the acts of their agents. The extraterritorial nature of these penalties reflects the serious criminal nature of bribery and the detrimental effects it has on Australian trade and reputation, and international governance.

It is no defence that such acts may be common practice in some countries. You must be aware of the types of activities that are legal and illegal when interacting with foreign officials. The offence applies regardless of the outcome or result of the bribe or the alleged necessity of the payment: companies and individuals may be held liable regardless of whether or not the bribe obtains the advantages sought and whether or not the bribe was considered necessary to do business. Refer to Attorney-General’s Department Foreign Bribery website