Be an Exclusive Distributor

Foreign Relations

Developing a relationship with the manufacturer may be the most critical point in the process of becoming an exclusive U.S. distributor.

Persistence is a major ingredient in this type of relationship building. Exclusive U.S. distribution licenses don't happen overnight, says Rosen, pointing to the year-long wooing of Mitsubishi that preceded the Jet Towel pact. The courtship began with a visit to Mitsubishi's website. That steered them to Mitsubishi Electric, the division responsible for the Jet Towel, and then to the unit's U.S. headquarters in Atlanta.

Though much relationship-building communication can happen by e-mail or phone, it will normally involve at least one trip to the foreign manufacturer, as well as a visit from the foreign manufacturer to check out your facility. After returning from Japan, Allard and Rosen began a series of trips from Seattle to Atlanta to talk with Mitsubishi Electric.

Relationship building is less about getting down to business than getting to know someone. "When you're trying to get comfortable doing business in another country, it's not easy to know who you can trust and who has the knowledge that fits with what your company needs," Rosen says. "So be patient, and focus less on the business side and more on the relationship."

Taking Care of Business
When it is time to focus on the business side, you'll need to demonstrate both commitment and the ability to adequately represent the manufacturer in the entire U.S. market. Rosen and Allard divided the country into 21 distributor territories and presented a detailed plan for acquiring appropriate distributors before receiving Mitsubishi's approval. The plan included projected sales volume and specific marketing strategies.

Don't be afraid to be different, Rosen says. Pacarc included some progressive marketing ideas in its proposal, such as search engine marketing, online communications with influential bloggers and a strong PR effort. "We like to think that's fairly out-of-the-box thinking compared to what a larger distributor would do," Rosen says.

Logistics is another key skill for exclusive U.S. distributors. Problems are always going to crop up when moving goods internationally, Nelson says. Consider using a customs broker for your initial shipments to help you learn the process. To assist with letters of credit, currency exchanges and other financial complexities of international business, develop contacts at a good international bank; that may be tough, however, because the larger global financial institutions don't always welcome small companies, Weiss warns.

To show commitment, the Pacarc co-founders purchased several Jet Towel units on their own and began making sales presentations to prospective customers even before inking the exclusive deal. Being able to demonstrate purchase commitments from actual customers helped greatly in convincing Mitsubishi that their passion for the product would lead to significant U.S. sales, Allard says.

When it comes time to negotiate deal terms, prepare yourself to accept that the arrangement won't give you permanent exclusivity. A term of one to three years is normal. At least two years is preferable, because it gives you a year to set up a distribution network and another year to develop enough sales to give you a return on your investment, says Nelson.

Your exclusivity may also be somewhat compromised by the deal terms. For instance, you may have to allow the foreign manufacturer to sell products that complement the one you'll be selling, Nelson says. You should also consider how to treat direct sales from the manufacturer to U.S. customers as well as gray-market goods-products that a distributor in another country sells in your territory illegally. You may be able to get partial commissions on direct sales and provisions to discourage gray marketeers.

Aim for specific provisions regarding finances, including who will pay for such costs as assembly of products, training for vendors and marketing materials. Normally, manufacturers are willing to share the costs of pre-assembly, printing marketing brochures, attending trade shows and travel expenses for sales calls.

The manufacturer contribution to marketing costs, along with unit price and expected sales volume, will help determine the all-important commission you can expect. This may run from 20 percent for an unproven product to a much smaller percentage for a commodity selling in high volumes to established customers.

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This article was originally published in the October 2006 print edition of Entrepreneur with the headline: The One and Only.

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