Remodelling overseas strategies key for success – Johnson

FOR companies which trade internationally, the need to evolve business strategies is paramount for success, a leading lawyer has said.

Robin Johnson, of Eversheds, believes that once established as an exporter, companies trading overseas have important decisions to make to allow them to grow further.

In the third of a series of articles analysing both the opportunities and challenges facing businesses who want to trade internationally, Mr Johnson has outlined the options available to allow companies to get the best out of their partnerships with distributors.

Last month Mr Johnson told TheBusinessDesk.com that companies launching export strategies should tread carefully when employing the services of overseas sales agents.

Mr Johnson today said that continually reassessing a company’s business model would pay dividends in the long term.
 
“After a couple of years working with some agents and distributors, it was time for our manufacturer to relook at its business model,” said Mr Johnson.

“Business had been steady, orders had come in, and looking at his numbers, he was able to see that certain geographic areas of his business were doing better than others.”

Significant orders had particularly come from Scandinavia but the exporter was conscious that he was giving away large amounts of commission to his Scandinavian distributor.

“He was mindful of his other agents and distributors in other jurisdictions and he didn’t want to set the hare running. However, it was time for him to rethink his strategy.”

When approached, the company’s Scandinavian distributor stressed against changing what was a successful relationship.

And after weighing up the pros and cons, the exporter decided that it wasn’t worth terminating the arrangement but it would be valuable to remodel it.

Options included taking an increased margin from the distributor by increasing the prices to the distributor and reducing the margin; buying the distributor out; taking a stake in it or launching a joint venture.

Assessing each option, the Yorkshire company decided against increasing prices and also concluded that the price for buying out the distributor seemed to be disproportionate to the value.

The Yorkshire company was also worried about what the distributor would do post-deal. For instance could they tie the distributor into a longer term arrangement, potentially through an earn out arrangement whereby some money was paid up front but the majority was deferred based on future earnings.

The final option was to take a minority stake in the distributor. The advantage of this is that the distributor still had ‘skin in the game’ but also the Yorkshire company was taking some of the benefits. 

Looking at the joint venture, Mr Johnson asks, what would happen when it came to an end? To what extent does the Yorkshire company need to get involved with how the distributor operated? Would the distributor have to be consolidated into the Yorkshire company’s accounts? 

From past experience the company was more aware of the need to do proper due diligence on any joint venture. After weighing up the pros and cons the company chose the joint venture route.

“They decided to take a strategic stake in the business which allowed the distributor to take some money out and they put in place a mechanism whereby over a period of time the Yorkshire company had the right to call for more shares,” explains Mr Johnson. 

“Ultimately, the distributor had a put option at the end of the day, but that was five years out by which time hopefully the Yorkshire company would be in a position and have its infrastructure in place to actually run the business. In the first six months the Yorkshire company quickly realised this was the right decision.

“They hadn’t really thought about all the issues associated with employment, IT systems, financing arrangements and they hadn’t actually asked any questions about how corporate governance worked in Scandinavia. 

“They had done limited due diligence because they were just taking a strategic stake.  That due diligence was carried out in effect after the deal.”

Next time: Where the Yorkshire exporter went next