A Lawyer’s Thoughts

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5 Strategies for Entering the U.S. Marketplace


by Bruce A. Fox [1]

At some point in the life cycle of any Latin American manufacturing or distribution business, it may become reasonable, perhaps necessary, to begin to look beyond the company’s own domestic market and to explore opportunities across national borders.  Frequently, in light of its size and growth potential, the U.S. market is a natural choice for this planned expansion.  But where should the company begin?  How should the effort be planned, organized, and implemented?  Should the company start with a low-risk toe in the water, or a bigger plunge that might help generate critical mass and recognition in the U.S. market?  Does the company have the necessary information, capital, relationships and infrastructure to pull it off?  Where can the right personnel be found to lead it?

It may be useful to begin this assessment by considering a variety of different methods commonly employed to achieve this broad goal, and the relative benefits and risks of each one.  Then, in coordination with a thorough review of the facts and circumstances that are unique to the particular company and its existing network of relationships, the company’s management can begin to craft a strategy for moving forward with its entry into the United States.

Going It Alone

For a company that is intent on retaining full control of its U.S. operations, it may be most desirable to grow into the market organically, either with sales and deliveries directly from the company’s home office or through a newly-established company presence in the U.S.  This presence may take the form of one or more U.S.-based employees of the Latin American company, but more often involves the formation of a U.S. subsidiary of the Latin American company, with the subsidiary taking responsibility for hiring the U.S.-based personnel.  This approach may be ideal where the company already has broad information about the U.S. market, has access to the necessary manufacturing and distribution networks, does not require additional capital, and has established contacts and relationships with many or most of its target customers.  But in prioritizing control and going it alone, the company is assuming all of the risk of the endeavor and is foregoing the benefits that may accrue from some of the other methods for entering the market described below.  Perhaps most significantly, a company that charges forward with this approach may find that its lack of a U.S. partner can lead it to misunderstand important cultural or regional differences that can easily disrupt or delay the planned rollout of the company’s U.S. marketing initiative.

Acquisition of a U.S. Company

Acquiring an existing U.S. business provides the Latin American company with a running start in the U.S. market.  In the ideal acquisition the Latin American company will find an acquisition target that will complement its own offerings, so it can immediately enjoy established facilities, management, a skilled workforce, established vendor and customer relationships, and cash flow.  Perhaps the acquired company has products or services to add to the Latin American company’s own portfolio, or presents opportunities for the Latin American company to immediately expand sales of its own products and services to the acquired company’s existing customer base.  The acquisition also allows the Latin American company to benefit from the existing cultural and regional knowledge and experience of the acquired company and its people.  Of course, as in any acquisition of a business, there are bound to be areas where the acquired company is not as strong as it is in others, and there are always risks associated with a transaction.  These risks can be mitigated by careful due diligence and skillful drafting of the legal documents, but they cannot be fully avoided.

Finding a U.S. Distributor

Some Latin American manufacturers hope to find a U.S. party that will purchase all of their product destined for the U.S. marketplace, and distribute it throughout the territory on its own behalf.  This is highly attractive in terms of simplicity, and can be one of the quickest ways to penetrate the market.  There’s no need to build out any infrastructure, hire personnel, analyze the marketplace, or develop extensive customer contacts.  But there are of course tradeoffs.  First of all, the Latin American manufacturer is not in control of its U.S. distribution, and instead is forced to rely on the dedication and skill of the third party distributor, who may have interests in other products or services that may render its strategy somewhat different from what the manufacturer would itself choose to do.  But even if the distributor is top notch and pursuing an attractive strategy, the manufacturer must be comfortable leaving some of the profit on the table for the distributor.  And perhaps more significantly, the manufacturer must recognize that it will not have the relationships with the end users of its products, and perhaps not even their names, contact information and purchasing history.  This can leave the manufacturer with limited negotiating leverage when the time comes to renew the distribution agreement, whether or not the distributor has performed admirably.  The careful negotiation of the distribution agreement thus is of paramount importance.

Finding a U.S. Sales Representative

Another possibility is for the Latin American manufacturer to enter into agreement with one or more sales representatives in the U.S. market, who will act on the manufacturer’s behalf in seeking to procure purchase orders from third parties for sales made directly by the manufacturer to the third parties.  This has some of the benefits, and detriments, which arise in the context of a distribution arrangement, such as avoiding the need to build out a sales capability but also relying on the efforts of a sales team that may have interests quite different from the manufacturer’s own interests.  In this case, however, the manufacturer is now contracting directly with its end users, so it captures information relating to their identity and purchasing history.  It also may be subject to certain contract claims made by these end users, which it might be able to avoid in a pure distribution arrangement.

Establishing a Joint Venture

A Latin American manufacturer should also consider whether it would be best served by entering into a relationship with a strategic partner, perhaps a U.S.-based manufacturer of a similar or complimentary product, which would permit the parties to pool their skill sets and resources to their mutual benefit.  Perhaps the Latin American party should license its technology and know-how to an American manufacturer, which can obviate the need for costly and time-consuming shipments from the Latin American company’s facility.  Perhaps the product is one that requires on-site installation or implementation, or must be customized to each end user, so that distribution can be most efficiently effected through a joint venture with a value-added reseller.  A joint venture, which may take the form of a detailed contract between the parties or may involve joint ownership and management of an entity formed for this purpose, will require in either case a precise and detailed negotiation of issues regarding the rights and duties of the parties, the term of the relationship, the allocation of decision-making powers regarding such matters as business strategy and cash distributions, financing obligations of the parties, and of course a thoughtful consideration of the process by which the arrangement will ultimately be unwound.

Entering into a new market in another country is a complex problem with a multitude of possible solutions.  Whatever form is contemplated, a careful international tax analysis needs to be performed based on the particular facts and circumstances, including a review of any applicable tax treaty between the respective countries, relative rates of income taxation, and consideration of the expected use of available cash.  Practical issues, such as time zone differences, language differences, cultural expectations, customer requirements and marketplace perceptions may also play a role in the selection of an appropriate strategy.  In most cases, however, some variation of one of these five strategies will prove to be an appropriate way to break in.

[1] Bruce A. Fox is a partner in the Corporate & Securities practice group of Neal, Gerber & Eisenberg LLP, a full service business law firm based in Chicago, Illinois USA. He advises clients through domestic and international mergers and acquisitions, joint ventures, private placements and other financing and commercial transactions in a broad range of industries.