An American company was negotiating its first agreement in Mexico. The Latin distributor continually refused to agree to any timelines or fixed amounts. The negotiation dragged on until the U.S. company brought in a bi-cultural Mexican-American to broker an agreement.

It turned out that sufficient trust had not been established between the companies. Once the distributor felt it had someone that would convey accurate information, and once the bi-cultural negotiator convinced the American company to invest more time in building the relationship, the contract got signed. The relationship ultimately ended up being wildly successful for both companies.

Negotiating a crossborder agreement flat out takes a lot more time to negotiate than the same agreement within your country, or between a U.S. and a Canadian company. Expecting negotiations to move at the pace of a typical domestic agreement is almost guaranteed to result in disappointment and frustration.

This concept is simple on its face, but in reality is often very difficult for some to accept. This is especially true for U.S. businesses who are hard-charging, “get ‘er done” kinds of companies. These organizations have deadlines and quarterly sales targets, and managers who hover over subordinates wanting to know why things are taking longer than the deadlines they created for themselves.

The reasons these agreements take so much longer varies. Time zone differences and language issues definitely play a role. Differing cultural expectations, though, usually have a larger impact.

In many places—Turkey is certainly one—your partner will want to take a long time to get to know their supplier, the people they’ll be dealing with, the management style, the company culture. In these countries, it’s all about the relationship, and the contract negotiation is a way to develop that relationship.

Other cultures simply relish the negotiating process. Many Middle Easterners and North Africans just love the process of seeing how many concessions they can squeeze out of every nook and cranny of the negotiation. This is simply a natural part of them getting to know you. And knowing this helps you formulate your negotiating strategy. If you go in with your bottom line on any position, you’ll find it difficult to reach agreement with a partner who expects to barter every point.

Germans are notorious for their desire for precision. They often want to get every last phrase correct, and they may think a sentence that is clear to you needs still more detail. Japanese companies often take a long time to negotiate agreements because they like to reach consensus on all points, and reaching consensus–both within their own organizations, and then with you—often takes time, sometimes a lot of time.

Latin American companies may take a lot of time to negotiate agreements because their perception of time, timely response, and urgency simply are quite different than in North America.

To effectively negotiate great distributor relationships in the international arena, you need to get a bit zen. Negotiating styles vary widely from country to country, and you must accept that your distributor is not going to change their culture suddenly to meet your arbitrary timelines.

It helps a lot to relax, and just enjoy the process of seeing the many different styles of negotiation. Getting frustrated will not force your foreign partner to be more like you!

In the end, continuing to build a good relationship with the distributor is most important – if you have that, you are much more likely to have a productive business partner and a better agreement than by simply rushing to meet artificial deadlines. And you may also need to help educate your own bosses to help manage their expectations.

Doris Nagel is managing partner of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Get a free excerpt from the book here.

Editor’s note: This is the sixth in a series of articles on Debunking The Top Ten Myths About International Distribution Agreements. Check out the previous articles in the series:

Myth #1: We don’t have time for a contract – we need to get busy selling!

Myth # 2: How we found our distributor is totally separate from our contract.

Myth # 3: Contract templates are great, because that way we can skip the legal review costs.

Myth #4: We Can Just Have Our Local Contracts Lawyer Review Our Agreements

Myth #5: We hope our foreign distributors don’t hand out bribes, but if they do, it’s really not our problem.

Myth #6: Two extremes: We never give exclusivity unless forced to, or, we give exclusivity freely.

Virtually every international distributor will ask for (or insist on) exclusivity. A frequent question in contract negotiations is whether you can or should give it to them. It’s an issue worth weighing carefully.

A story illustrates the danger of exclusivity. A New Jersey company appointed an exclusive distributor in Puerto Rico. After a great start, the distributor’s sales results dropped. Eventually, the supplier terminated him.

The distributor responded by demanding payment of five years’ worth of profits, pointing to something called Puerto Rico Law 75. The supplier refused, arguing that their written contract was governed by New Jersey law, which required no such payment.

After many discussions with a Puerto Rican lawyer (who should have been consulted before the agreement was signed), the American company realized that their island distributor would sue them in local courts and would almost certainly win his Law 75 payment—even though he failed to purchase agreed minimums under the contract.

Although an extreme example, many countries provide protection when local distributors are terminated. Thus, it’s not surprising that many suppliers think long and hard about granting exclusivity.

There is no single rule about granting exclusivity. It depends on the geography, local laws, what is customary in your industry, and practical business considerations.

The best we can do is set out some of the most common factors to consider.

Does local law permit the type and extent of exclusivity you are considering? Simply stating that the laws of New Jersey governs your contract is not sufficient. Exclusivity and goodwill payments upon termination are two areas where local law will often override anything you put in your distribution contract.

In some countries, true exclusivity is not possible. For example, the EU rules on distributor exclusivity surprise many suppliers. Since the EU is a common market, you cannot prohibit your Greek distributor from selling to customers in Italy, or Germany or anywhere else in the EU. This is an important consideration in pricing your products throughout the EU, as products priced lower for the Greek market will be attractive to customers elsewhere in European.

When granting exclusivity, it is expected to have minimum purchase requirements. You will still want to understand which these will be enforceable under local law, especially regarding “take or pay” minimum purchase provisions.

If a distributor insists on exclusivity, but is unwilling to agree to enforceable minimums, think long and hard before moving forward with this partner.

You will also need to weigh the practical and business considerations. In some cases, you may have no real choice on exclusivity. If there are only two qualified distributors in a market and your competitor already works with one, you have limited negotiating leverage. In other markets, you may have found the perfect distributor, but they may refuse to do business with you without exclusivity. In other markets and verticals, exclusivity is customary and a virtual necessity for doing business.

Are you are willing to invest in the distributor, and vice versa? When you give a distributor exclusivity, your options in that territory have become very limited, so be sure before you agree to exclusivity that both you and your distributor have agreed on the needed investments and what each of you will pay for.

Evaluate any exclusive distributor very carefully. Spend as much time with them as possible and do plenty of due diligence to make sure they are your best choice of partners.

Ensure that you contract allows you to terminate exclusivity without terminating the entire agreement. Although often difficult to manage from a relationship perspective, there may be advantages to continuing the distribution relationship, but without exclusivity.

Understand clearly the local law requirements for terminating exclusivity, including the grounds for termination and whether any payments will be due.

Doris Nagel is managing partner of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Get a free excerpt from the book here.

Editor’s note: This is the sixth in a series of articles on Debunking The Top Ten Myths About International Distribution Agreements. Check out the previous articles in the series:

Myth #1: We don’t have time for a contract – we need to get busy selling!

Myth # 2: How we found our distributor is totally separate from our contract.

Myth # 3: Contract templates are great, because that way we can skip the legal review costs.

Myth #4: We Can Just Have Our Local Contracts Lawyer Review Our Agreements

Myth #5: We hope our foreign distributors don’t hand out bribes, but if they do, it’s really not our problem.

Most companies today know that foreign bribery is bad, and may even know it’s illegal. They may have heard of the U.S. Foreign Corrupt Practices Act (FCPA), or the UK Bribery Act, and other similar laws.

But there are plenty of companies that export using distributors still don’t understand that they can be held accountable for bribes their distributors make. Maybe it’s because it seems far-fetched that a completely independent company like your distributor can put you at risk for their actions. Maybe it’s because it seems unlikely your distributor or you will get caught.

Whatever the reason, the truth is: more and more companies are finding themselves subject to FCPA enforcement because of their distributor’s bribes.

One example: A U.S. company was charged with violating the FCPA because its distributor in Brazil was paying bribes to customers. The case settled, with the company paying a large fine. The U.S. government did not claim that the U.S. company actually knew about the distributor bribes. Instead, the claim was that the U.S. company should have known because it did not takes the necessary steps to prevent that bribery.

According to the U.S. government, here’s what that company (and every U.S. company) needed to do with their foreign distributors to avoid liability:

• Conduct thorough due diligence, which may include regular background checks and investigations on distributors.
• Include anti-bribery language in all distributor agreements (which presumes you must have written contracts) that clearly allows you to terminate if you discover bad behavior.
• Train your distributors (as well as your employees who interact with them) regularly on anti-bribery compliance.
• Clearly understand how your products are reaching the end customers and confirm if there are any other intermediaries.
• Prohibit use of sub-distributors, agents, or other intermediaries by your distributor unless you have investigated appropriately and provided written approval.
• Make sure your distributors’ customer margins, and any other compensation you pay them, are reasonable and customary.
• Have controls in place to make sure any red flags are raised and addressed.
• Have your internal audit or finance function monitor this program regularly.
• Document everything that you verified, as well as how any issues or problems were investigated and resolved.

If you have foreign distributors and haven’t at least considered some or most of these steps, you’re at risk—especially if your distributors sell to local governments. And remember that the reach of what is a government in many countries is far beyond what is typical in the United States. In healthcare, for example, medicine is socialized in most countries, and that means that the hospitals, doctors, and clinics that your distributor sells to are all government officials and entities.

Don’t believe you might get caught? Most of the companies on the growing list of enforcement cases never believed it would happen to them, either.

Here’s some of the ways they got tripped up:

• The company was for sale, and distributor bribes were found during due diligence.
• Company auditors asked questions and found evidence of bribery.
• Competitors hear rumors of bribery and report you.
• Whistleblowers, including current and former employees and consultants, contact the authorities.

By the way, bribes are still pretty common in many countries. So make sure you get good legal advice when exporting so that you can assess bribery risks and create an anti-corruption program that works for your company.

Doris Nagel is managing partner of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Get a free excerpt from the book here.

Editor’s note: This is the fifth in a series of articles on Debunking The Top Ten Myths About International Distribution Agreements. Check out the previous articles in the series:

Myth #1: We don’t have time for a contract – we need to get busy selling!

Myth # 2: How we found our distributor is totally separate from our contract.

Myth # 3: Contract templates are great, because that way we can skip the legal review costs.

Myth #4: We Can Just Have Our Local Contracts Lawyer Review Our Agreements

Our story today begins with a Michigan company terminating their poorly-performing French distributor. They gave the required written notice under their distribution agreement, which stated that Michigan law applied. The French distributor’s response was to demand a six-figure goodwill payment, not something that was in the contract and certainly not something the U.S. supplier would have ever considered.

So the U.S. company refused, saying Michigan law did not entitle the distributor to this payment. The French distributor sued in French court and won the full award plus costs and other expenses.

How can this be, you may ask? Because French legislators decided it was fair and reasonable for local companies to receive termination compensation for their efforts to develop a supplier’s business. The French distributor is based in France, and therefore entitled to this protection. French judges are not particularly interested in what Michigan law says about the issue, and there is no international body or treaty that can force any other decision. So, the French distributor seeks the protection of French laws and the French judge agrees.

How did things go so wrong?

Just Because a Signed Contract Says Something Doesn’t Make it So

Many companies are surprised by situations similar to our Michigan supplier’s. After all, if you’re a Michigan company and you’re negotiating with a California supplier, if you agree that Michigan law governs, it generally will. And if you put in your contract that all lawsuits must be filed in Michigan courts, that, too, will be respected.

But that’s because U.S. states follow the same legal system. When you have a contract with a foreign distributor, you now have two completely different legal systems—yours, and that of your distributor. The contract interpretation becomes much more complicated and much less predictable. Expert legal advice is needed to sort out the rules that will apply, and how they will apply.

In some countries, such as the UK, the selection of which legal system to adopt for the contract (called “choice of law”) is respected. But in most other countries, if there are local laws that offer more protection than Michigan law, the distributor may be entitled to sue you locally to benefit from that protection. And they’ll often win.

Returning again to our French distributor, the Michigan company could have decided to ignore the French court judgment, and forced the French distributor to figure out how to come to Michigan to actually collect on his French court award. This is neither an easy nor inexpensive process, so it may depend on the amount at stake. But our Michigan supplier also needs to consider its future plans for the French market: is it willing to suffer serious damage to its brand in France? Are there any other operations in France that must be taken into account?

Balancing all this is complicated, and depending on the amount at stake, requires not only an experienced international attorney in your home country, but selective consultation with their counterpart in the distributor’s country. And the lawyer in the distributor’s country cannot be just any local commercial lawyer, but a lawyer who also is experienced with crossborder transactions.

How do you find these local lawyers? Experienced international lawyers in the U.S. have developed networks of specialized lawyers in other countries that they have tested and come to rely on over the years. It’s part of what you get when you hire a U.S. lawyer with lots of crossborder expertise.

For these reasons, you should NOT have your international distribution agreement reviewed by the local lawyer who helps your company with other business, even other contracts—unless they also happen to be an experienced international lawyer, which is unlikely.

That attorney needs to be smart enough and honest enough to tell you to hire a lawyer experienced in crossborder agreements—and you should listen to them. And if they don’t tell you? Stay tuned!

Doris Nagel is president of Blue Sky Consulting Services, a company that helps clients enter the global marketplace and and works with them to build the foundation for sustained global sales growth. Previous articles in this series can be found here, here, and here.

Many companies use contract templates with their international distributors. A medical device company, for example, agreed to distribute Chinese-made gloves. The products self-combusted and burned down the California warehouse where they were stored. The U.S. company demanded compensation from the Chinese supplier, but unfortunately, the template distribution agreement never addressed product quality–only quantity and price.

As this company learned, templates are a great place to start. But they are only the START, and should not replace competent legal review.

First, Make Sure You Start With an Appropriate Template

These days, it’s easy to find templates on the internet. You can purchase them online, or obtain them from colleagues, trade associations, or government agencies. Even most lawyers will admit they start with a document repurposed from somewhere.

Make sure the one you use fits your situation.

Some questions to ask to ensure you’re starting with a good template:

Do I Have an Agent or a Distributor? A lot of companies use the term “distributor,” but they really mean an agent or manufacturer’s representative. Both distributors and agents help manufacturers sell their products to foreign customers, but that’s where the similarities end.

A distributor purchases your products and then re-sells them to his/her own local customers. Agents help find customers and arrange the sale, but never purchase the products. The manufacturer in this model sells directly to the local, in-country customer.

Why is this important? Because the legal agreements for the two types of arrangement are totally different. If you pull a “distribution agreement” off the internet, but you have an agent, you’re not even starting with the right kind of agreement.

Does the Template Cover All the Key Points? Make sure your template is comprehensive. This does not mean the longest form, or the one with the most sections and subsections. It means one that sets out all the key points for your business.

Many templates omit essential provisions like governing law, or how international disputes will be resolved. Many do not specify title transfer of the goods transfer, or are unclear about international shipping terms.

Further, most companies have specific needs that a template may address, such as forecasting, demand planning, amount of local inventory to be held, specific regulatory requirements, or reimbursement for various investments. You may want to have your template customized so that it clearly fits your needs.

Does It Adequately Address Services or Software? Distribution templates are typically product-focused, and may not address related service and software issues. Today, there is often a service component to many product sales. For example, is installation required for your products? What about trouble-shooting, maintenance, upgrades, and warranty repairs?

Be sure your template clearly addresses these issues, if relevant. Spell out which repairs will you do, which your will distributor do, and which require the product to be returned for repair. Be sure your template sets protections for your source code, as well as how distributors become certified to perform certain services.

Second, Templates are NOT a Substitute for Competent Legal Review

Used wisely, a good template can facilitate the negotiation process. Unless you’re very experienced with legal agreements, however, you’ll benefit immensely from having a qualified lawyer review the document with you.

Agreements without legal review often omit important provisions. Many are worded poorly and the interpretation is subject to dispute. Often the annexes are not attached. Many template agreements do not even reflect what the parties say they agreed to, much less what they are disagreeing about!

Review by an experienced international lawyer is especially important for crossborder agreements. We’ll explain why in more detail in our next article, but these agreements really are not like your typical domestic contracts, and require specialized expertise.

Otherwise, you’ll have a written contract, but one that won’t help much when you need it.

The contracting process is also a great way to build a relationship with your new partner. Conflicts and disagreements should not be avoided – by working through these, a good partnership is made stronger as each gains trust in the other that tough issues can be worked through with give and take.

Doris Nagel is president of Blue Sky Consulting Services, a company that helps clients enter the global marketplace and and works with them to build the foundation for sustained global sales growth. Previous articles in this series can be found here and here.

[Editor’s note: This is the second in a series of ten articles debunking some common misconceptions about international distribution agreements, from a lawyer who has negotiated hundreds of crossborder agreements involving distributors in more than 75 countries.]

Joe, the VP Sales at a PVC fencing and garden products company, was eager to start exporting products. He went to a trade show in Europe with the help of a state grant, and came home with business cards for three different distributors who really liked the products. Joe spent a lot of time and expense sending samples (heavy and costly to ship overseas) and boxes of promotional materials, and made numerous phone calls. He sent them his form distribution agreement, but got no response. Communication dwindled, and things never progressed to a contract with any of the three.

Why did things go so wrong?

First, Joe allowed distributors at the trade show to recruit him, rather than the other way around. Many may ask:what does that have to do with the distribution contract?

It matters because the best foreign distribution agreements start long before sitting down with a written document.

A supplier with a distributor recruitment process has thought pretty carefully about its objectives for its distribution business. These objectives can be clearly articulated, which leads to discussions with distributors that are more productive for both companies. They see mutual interest right from the outset of the relationship (or the lack of real interest becomes clear very quickly).

The contract negotiation process is consistently smoother when suppliers do a lot of the contract pre-work by thinking carefully about what they want in their distributors, envision what a great distributor looks like, and then go find those distributors.

Second, Joe didn’t do any real due diligence, or investigation, into his potential distributor partners. Due diligence also helps create better agreements because it weeds out distributors that are bad fits long before wasting time finding that out through a painful contract negotiation process.

Suppliers often have no real idea who the new potential distributor is—particularly in foreign countries. Take the time to utilize government and other private due diligence resources, as well as the internet, to learn as much as you can about your new potential partner. This process also shortens and focuses the contract negotiations—think of partner recruitment and due diligence as pre-contract preparation.

Third, Joe never asked any of his potential distributors for a business plan. Getting even a basic business plan from a potential new channel partner is another great way to make sure they’re serious about helping build your business. Discussions about this plan also shorten and simplify the contract process.

Each of these three steps—partner recruitment, due diligence, and a business plan—will not only get your international distribution contract agreement negotiated and signed more quickly, but will like result in distributors that are longer-term partners and sell more of your product.

Doris Nagel is principal and founder of Blue Sky Consulting (www.blueskyconsultingservices.com), and has 25+ years of hands-on global experience, focusing on strategic partnering, market entry strategy, compliance, training, and risk management.  She’s a frequent speaker and author, and is currently working on a book on international distributor networks. 

[Editor’s note: There are lots of articles out there about the benefits of exporting. The art of negotiating a contract with an international distributor, however, isn’t discussed much. This is the first in a series of ten articles debunking some common misconceptions about these agreements, from a lawyer who has negotiated hundreds of crossborder agreements involving distributors in more than 75 countries.]

A sink manufacturer met a potential Saudi distributor at a Dubai trade show. The distributor was wildly enthusiastic about the supplier’s products. The distributor claimed to have lots of connections to major Saudi construction projects, and the two companies quickly agreed to a handshake exclusive distribution arrangement.

The distributor placed a couple of orders and was calling frequently, asking for special pricing, rush fabrication, expedited shipping, and a variety of other one-off requests. The manufacturer refused most of these, and pretty soon, the calls—and the orders—stopped coming.

It turned out, after considerable back and forth, that the two companies wanted very different things. The manufacturer wanted a company that would just go out and sell the products within certain price and delivery constraints—a transactional relationship. The distributor, on the other hand, wanted a partnership—a manufacturer who would work closely with them to meet and rapidly-changing demands of the local marketplace.

How did things get so far off track? One key reason: the parties never took the time to really set out in writing and agree on all their expectations.

The art of reaching true agreement with a foreign distributor is a delicate dance. At the beginning, the relationship is full of possibilities and enthusiasm. Both companies want to reach agreement and get down to the business of selling things as soon as possible. Many companies will only do a legal agreement if their legal department insists on it, and if they don’t have a legal department, it probably won’t happen.

Even companies with written agreements may think of the contract as something to be done at the end of the negotiations—a necessary evil to tidy up the little details, but that delays getting on with the business at hand.

But they’re missing a great opportunity: the contract negotiation process ensures the parties truly have clarity and consensus, and as an added benefit, builds the all-important relationship between supplier and distributor.

There are many things that companies that come from the same or similar cultures take for granted in a negotiation that simply cannot be assumed when negotiating across cultures. Between 60 percent and 80 percent of crossborder deals fail to meet financial expectations. The main culprit: cultural disconnects. International distribution agreements are no different.

The real issues often lie under the surface like an iceberg. The parties often talk past each other in crossborder negotiations. Basic terms that seem self-evident become points of lengthy negotiation. Discussions get stuck on issues the other considers silly. Things often take much longer because of these, as well as differing perceptions of time and approaches to negotiation.

Through the contract negotiation process, a good international lawyer helps reveal gaps in understanding that are never an issue in domestic negotiations, and coaches and guides the parties to a better partnership. Working through small conflicts as part of the negotiation builds trust as they gain confidence they can successfully work through inevitable disagreements.

The contract negotiation is also a last opportunity to make sure you really want to do business together. It’s OK if you don’t—it’s better to find this out before you both spend lots of time and resources trying to make a doomed relationship work!

A couple of good practices:

Use a customized checklist or bulleted term sheet for each kind of business and products/services involved, so that the business team addresses these before working on the contract. It’s easy to then telescope the term sheet into a contract form, provided the term sheets are sufficiently detailed.

Listen carefully to the partner’s pain points. Look for messages beneath what is said. Often one or both parties fear ceding too much control, and trust is usually built over a relatively long time period.

Don’t hesitate to bring in a bi-cultural expert or experienced outsider to help move the parties through difficult patches.

Take the time to negotiate a good written agreement. Otherwise, you’ll waste a lot of time—your most valuable resource—with foreign distributors that just don’t see things the way you do.

Doris Nagel is principal and founder of Blue Sky Consulting (www.blueskyconsultingservices.com), and has 25+ years of hands-on global experience, focusing on strategic partnering, market entry strategy, compliance, training, and risk management.  She’s a frequent speaker and author, and is currently working on a book on international distributor networks.