So, You Want To Export To Canada, Eh?

Canada, because of its geographic proximity to the United States, shared language and similar business culture offers a logical expansion opportunity for companies that have successfully developed, marketed and sold a product or service in the United States.  In 2012, bilateral trade between the United States and Canada for goods and services totaled approximately $742 billion, representing more than $2 billion of goods and services crossing the border every day, and Canada is currently the United States’ largest goods trading partner. There are a number of ways to export your products or services to Canada, each of which require differing levels of management, capital commitment and expertise.

Selling to domestic buyers, who export your product

Selling to domestic buyers who export your product offers a simple way to sell into Canada, since the domestic purchaser handles all aspects of export administration and assumes all risk associated with exporting.  Examples of domestic buyers that purchase for export include parties who represent Canadian customers, such as Canadian government agencies, distributers or retailers.  Another class of buyers includes intermediaries, such as export management companies, who are responsible for finding Canadian purchasers for your products.  Better export management companies specialize by product or by market, and because of their specialization and existing networks, can significantly reduce the time and resources required to enter a new territory like Canada.

Direct Exporting

Accessing the Canadian market directly provides a number of significant benefits for a company, including enhanced control over the export process, the ability to gain valuable insight into foreign customers and competition and potentially higher profit margins.  Direct exporting, however, can be much more labor and capital intensive as foreign representatives need to be identified, and working relationships established.

One method of direct exporting is entering into an arrangement with a Canadian sales representative, who then locates and introduces your company to potential customers.  As an alternative, direct exporting can be achieved by locating foreign distributors who purchase your products (usually at a discount to wholesale prices) and then resell your products to retailers or dealers in the territory.  If your company has sufficient resources, it may attempt to locate and sell directly to retailers or to the ultimate end consumer in Canada.

Legal Challenges

In the event your company uses intermediaries to achieve its export objectives, careful thought will be required in the selection of your partners and your agreements with any such party.  For example, will your agreement with such party be exclusive in Canada or in certain channels of distribution?  If the arrangement is exclusive, thought has to be given to the circumstances under which the arrangement will become non-exclusive—for instance if the party fails to fulfill certain sales requirements over a specified period of time.

When entering into a business relationship with an intermediary, it is also important to think about safeguarding the reputation of your brands.  At a minimum, your agreement with a third party representative should include pre-approval rights with respect to marketing strategies and advertising campaigns.  To enhance the reputation of your brands in Canada, you may also negotiate that your third party representative incurs minimum marketing expenditures on your behalf to promote your products.

A well structured relationship should also address the resources you expect the third party to provide during the term of your agreement.  For instance, how many people will be devoted to the sale of your products in Canada and will the efforts of a particular person in the organization be required?  Also, will the third party be required to provide customer support on your behalf, and if so, to what extent?

Perhaps most importantly, it is essential to provide escape clauses in your agreement to enable you to terminate the relationship in the event it does not develop as expected.  For example, you may want to limit the term of the agreement to a period of one year, which agreement will automatically renew for an additional specified period unless either party gives notice.  This will allow you to evaluate the performance of the third party without getting locked into a long term commitment.  Your contract should also specify the circumstances under which you can terminate for non-performance or for breach.

When entering into a relationship with a third party representative, thought also has to be given to your needs upon the termination of the relationship.  For instance, will a distributor have the right to continue to sell products in Canada to deplete their existing inventory or alternatively, will you have the right to repurchase unsold inventory?  The agreement should also mandate the return of confidential information and other property following its expiration or termination.

Although exporting may seem daunting and fraught with risk, it is possible to export to Canada with minimal resources and capitalize on new growth opportunities for your products.  The key lies in carefully selecting third party representatives for your brands and relying on your advisors to help you properly structure your commercial arrangement with such third parties.

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JonathanFriedmanFor more information regarding cross border transactions and similar inquiries, please contact Jonathan Friedman, attorney with Stubbs Alderton & Markiles, LLP (jfriedman@stubbsalderton.com) . Jonathan’s practice focuses on venture capital and corporate finance, intellectual property licensing, mergers and acquisitions, securities law and general corporate and business matters.  Jonathan, a Canadian citizen, also specializes in Canadian/United States cross border transactions and sits on the board of the Canadian California Business Council.  Jonathan received his Bachelor of Applied Science in Mechanical Engineering in 1998, his M.B.A. in 2002, and his J.D. in 2002, all from the University of Toronto.

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