Unlocking international markets: How UK businesses can expand overseas though different legal agreements

Whilst most UK businesses have understandably concentrated on the European market for foreign expansion, appetite is growing further afield, making consumer direct trade less favourable. Furthermore, robust strategic planning and well-structured legal agreements are fundamental for the success of your business’ international expansion. This article aims to explore three strategic pathways – distribution agreements, agency agreements and manufacturing agreements – that UK businesses can leverage to expand internationally.

1.      Distribution Agreements

What is it?

Distribution agreements can be an efficient way for businesses to expand internationally, without bearing the full costs and risks associated with establishing and incorporating local operations.

In essence, this provides that you as the supplier or manufacturer will sell your goods to a distributor, who then sells these on to customers. Generally, we would recommend that you take time to conduct due diligence on any potential distributor alongside legal research into the local legislation of the territory your distributor will be trading so any agreements can be tailored to comply.

Moreover, you must decide whether you intend to grant exclusive or non-exclusive rights to a distributor within the target territory.

Exclusive Distribution

Whilst this limits the distributors you can work with, it may in turn incentivise an exclusive distributor to focus and invest heavier on marketing and distribution channels. A distributor often possess local knowledge, has a local client base and often agrees to take on the high risks and costs associated with promoting a new product, which is essential where intensive brand-building is required within a new market.

If you have concerns regarding a distributor’s performance, you can draft in benchmarks (such as minimum sales volumes), exclusivity withdrawal terms or termination rights if that may be exercised if such benchmarks are not met. UK businesses will also be keen to draft in obligations placing responsibility on distributors to comply with local formalities and obtain any necessary permits at an early stage.

Non-exclusive Distribution

A non-exclusive agreement provides businesses with complete freedom to sell directly to customers or appoint multiple non-exclusive distributors within one territory – which helps maintain control and broader market reach. Ordinarily, we observe far less onerous terms within these appointments as distributors will need to compete with the supplier and other distributors in terms of both pricing and promotion of the product.

Implementing selective distribution systems, where you appoint distributors on the basis that they meet a required criterion, may be attractive to chosen distributors. This effectively limits the number of additional distributors who will be appointed within the territory and can be particularly suitable where a product requires an enhanced level of service or advice at the point of sale (i.e. high value cosmetics and electrical goods).

Sole distribution

A sole distribution model allows a supplier to appoint a distributor as the main representative within a territory, whilst reserving the right to sell directly to customers; this approach combines exclusive and non-exclusive benefits, enabling retention of a proportion of market control.

This kind of agreement would contain similar provisions and restrictions to those in an exclusive arrangement, but it would afford more control by the UK business over the territory, should the distributor fail to meet a required minimum purchase target.

2.      Agency Agreement

What Is it?

Unlike a distributor, an agent sells products on behalf of the UK business rather than directly purchasing and selling the goods at a minimal upfront cost for your business. Agents often possess in-depth knowledge of the local market, including customer preferences, other competitors and regulatory considerations which can be invaluable upon entry into a new area.

Types of agency agreements:

As discussed above, agency agreements can also be granted exclusive or non-exclusive rights. Businesses should also specify within such agreements the types of products they would like the agent to sell, particularly if they offer multiple lines or categories.

The drafting and construction of agency agreements can vary widely, depending on the extent of authority granted on them to handle and enter into sales transactions. Agreements can be structed so that the agent:

-          simply introduces potential customers to the UK business, earning commission from each referral;

-          focuses on advertising and marketing efforts for the UK business, without any authority to complete sales of the products; or

-          engages in exclusive cross-border sale arrangements on behalf of the UK business.

These are examples of the different structures and role of the agent a businesses can tailor their agreements to.

Further provisions

One of the key provisions to consider with an agency agreement is how you would like to draw in a commission structure or payment terms. Will this be based on a commission percentage for each sale? Will you append a schedule arranging when commissions are paid (i.e. monthly or quarterly)? Will you offer incentives (i.e. tiered commission rates or bonuses) on high sales volumes? When determining what works best for your business, consider checking local norms and ensuring the rate is competitive to keep the agent motivated.

If this is an agreement you are considering, it is advisable to put a written agreement in place. In absence of this, agents possess substantial rights under the Commercial Agents Regulations (‘CAR’), in particular agents can seek a considerable non-capped compensation payment upon termination. However, such rights can be modified or limited by incorporating provisions within a written agreement. This may look like an option to pay an indemnity on termination, capped at one year’s remuneration, rather than allowing the agent to rely on the limitless compensation presented by the CAR.

3.      Manufacturer Agreements 

What is it?

Furthermore, outsourcing the manufacturing process is another alternative that provides UK businesses with an effective pathway for international expansion. Essentially, a manufacturer agreement governs a partnership between a UK business and a foreign manufacturer to produce goods on their behalf.

Benefits

Manufacturing agreements allow businesses to leverage foreign production capabilities and enter new markets fast at lower upfront costs with increased flexibility.

Outsourcing manufacturing usually comes with reduced production expenses, especially in countries with lower labour and material costs, which can in turn allow UK businesses to price products competitively within international markets. This method also minimises capital expenditure, with UK businesses utilising contract manufacturers’ established infrastructure, rather than building and managing new facilities abroad. Established facilities also mean that there is experienced staff and operational ‘know-how’ which allows UK business to scale production and enter international markets quicker – this can be valuable in sectors where rapid product adaptation is key.

Local manufacturers also have a deeper understanding of regional market demand, regulations and supply chain dynamics; whereby they can advise on local performance, regulations and compliance factors which can be critical when negotiating and tailoring these kinds of agreements.

Often, contract manufacturers have specialised equipment and advanced technology, which can enhance product quality. We would recommend implementing quality control within your agreements, through defined standards and inspection processes for contracted manufacturers to comply with and meet UK business quality requirements.

How can we assist?

We specialise in supporting businesses as they expand internationally by providing comprehensive legal advice and tailored agreements that best suits your goals, needs and growth strategy. With our assistance, you can confidently navigate international markets and establish overseas relationships, whilst ensuring your business is protected.