Synch U.S. Playbook
Get Moving in the U.S.
MARKET ENTRY ALTERNATIVES
How Scandinavian Companies do Business in the United States (U.S.)
Many Scandinavian companies aim to sell products or services in the United States (“U.S.”). The timeline for ‘when’ to do so can be based on factors such as demand, funding, staffing, existing channel contacts, the ability to localize offerings, demographics, intellectual property (“IP”) management, branding, etc.
Let’s have a look at 8 common methods for taking product and service offerings into the US:
- Direct sales from Scandinavia
- Branch Office
- Joint Venture
- Sales Representative
- IP Licensing
Direct Sales from Scandinavia
For many Scandinavian companies, the initial foray into the U.S. results from an American customer’s request for a product or service. Such order requests should not be treated the same as domestic transactions and should only be accepted after careful consideration. Before making sales from Scandinavia directly into the USA, Scandinavian companies need to consider a number of issues, such as: when/how should the product or service be delivered (before or after payment); if there is a physical product, where should the title/risk of loss pass to the customer; how will returns and support be handled; what realistic recourse is available if the customer fails to pay; must your company register with the Internal Revenue Service (“IRS”) given the type of deal; is there any regulatory compliance required (e.g. the Food and Drug Administration); what terms, conditions, body of law, and dispute resolution venue and mechanism will regulate the contractual relationship; how your company’s IP should be protected; whether there are any laws implied into the relationship that must be disclaimed to exclude them from the deal (e.g. such as warranties of merchantability or fitness for a particular purpose); or immigration issues if your Scandinavian personnel will be required on-site in the US.
In light of this, it is considered best practice to define a U.S. business strategy (and standard contract terms) before doing any U.S. business. Following are some methods Scandinavian companies use to enter the US:
A branch office can be formal (i.e. pursuant to your company’s registration in the U.S. to have an office there) or inadvertent as a permanent establishment (i.e. as a result of your company’s conduct in the U.S.). Many companies are surprised to find that by hiring a consultant in the U.S. to assist with lead generation and deals, the company may unintentionally create a business presence in the US. Generally speaking, Scandinavian companies do not intentionally form U.S. branch offices given U.S. branch offices are not treated as a separate legal entity and therefore unreasonably expose the Scandinavian parent company to U.S. legal and tax liabilities.
A subsidiary is a separate U.S. legal entity (generally formed as a C-corporation that is owned directly or indirectly by the Scandinavian parent company). C-corporations are taxed at the corporate income tax rate separate from the company’s owners. This means profits distributed as payments to the owners are taxed twice—first at the corporate level and second at the owner level. U.S. companies (i.e. owned by U.S. shareholders) can avoid this double-taxation by electing to be treated as an S-corporation, which is a “pass though” entity for federal tax purposes. A foreign company (not owned by U.S. shareholders), however, cannot elect to be treated as an S-corporation.
It is worthy of mention that there may be investment and/or tax reasons to form a U.S. corporation to become the parent company of the foreign company. With that said, the discussion herein is limited to the more common context of the formation of a U.S. subsidiary.
Subsidiaries are often considered desirable given a subsidiary generally insulates the parent company from liabilities caused by the subsidiary in the US. Further, the business of a subsidiary, if conducted properly, can ensure the parent company is not subject to U.S. and/or state taxes. In such cases, only the subsidiary will be required to report/pay such taxes.
Another advantage of a subsidiary is the parent company will have a physical presence in the U.S., increasing brand awareness and credibility of supply in the US. Moreover, if the U.S. government will be a potential customer, having a U.S. presence may promote sales given the ‘Buy America Act’ (41 U.S.C. §§ 10(a) – (d)), which gives statutory preferences to U.S. suppliers.
In the event a subsidiary is formed, the parent company will generally designate the subsidiary as either a sales representative (discussed below) or a distributor (discussed below). In both cases, care is required to ensure the parent company will not be treated as conducting business itself on the U.S. market.
A joint venture is generally a legal entity owned, in part, by the Scandinavian parent company and by one or more other owners. Joint ventures are often created for a specific duration of time after which one party can buy out the other owner(s) based on a metric in the joint venture agreement which typically relates to some pre-defined multiple on the revenue levels and/or EBITDA achieved by the joint venture. Joint ventures, if constructed properly, must take into consideration a range of factors, such as, each owner’s contribution, each party’s right to payments during the lifetime of the joint venture, how board and shareholder decisions shall be made, whether or not any owner can sell its ownership interest to a third party, ownership of any IP created by the joint venture, non-competition undertakings, etc.
Sales Representative (“Sales Rep”)
A sales rep (often referred to as an agent in Scandinavia) is generally a marketing-and-sales support arm in the US. A sales rep does not purchase products from a Scandinavian supplier but rather works as an intermediary to connect Scandinavian suppliers with American customers in exchange for a commission. A sales rep can be exclusive or non-exclusive and the sales rep’s rights will typically be limited to a specific geographic territory—i.e. that portion of the U.S. that the sales rep can reasonably cover. Typical pitfalls with this method result from a supplier too heavily controlling the sales rep—so much that the IRS deems the sales rep to be the supplier’s employee thereby subjecting the parent company to employee tax issues as well as potential income tax exposure in the US. Additionally, under some circumstances where the sales rep actively negotiates with U.S. customers or accepts orders directly, there may be a finding that the sales rep’s conduct is tantamount to the Scandinavian parent company having a U.S. business presence itself. In light of this, it is generally advisable to prohibit sales reps from negotiating and/or closing agreements on the parent company’s behalf.
A distributor scenario involves a U.S. distributor purchasing products from the Scandinavian supplier for resale of such products to customers within the U.S. and for a profit. Typically, distributors have full control over resale prices to U.S. customers. A distributor can be exclusive or non-exclusive and the distributor’s rights will typically be limited to a specific geographic territory again, as in the case of the sales rep, based upon the distributor’s ability to reasonably cover and service the territory. Any exclusive appointment of a U.S. distributor should be carefully drafted and subject to sales targets being achieved throughout the U.S. and/or on the basis of more narrowly defined regions. If such targets are not achieved, your company should have the right, at its sole and absolute discretion, to either terminate the agreement in its entirety or convert the exclusive rights to non-exclusive rights. At times, merely having the right to convert exclusive rights to non-exclusive rights will be insufficient as this prevents the Scandinavian supplier from appointing an alternative distributor ‘exclusive’ rights which will likely be a prerequisite for qualified distributors.
A franchise is, in essence, a distribution arrangement with a few additional attributes. Firstly, the supplier provides some business method for carrying out the business in the US. Further, the supplier’s trademark (i.e. brand) is licensed to the franchisee. McDonald’s is a common example as almost everyone has been to a McDonald’s and understands each McDonald’s complies with a comprehensive manual of how to conduct business and such franchises are required to operate under the McDonald’s trademark. Finally, very often there is a franchise or trademark fee distinct from the other fees payable to the franchisor.
Franchises may be regulated by state agencies/laws given franchisees often invest substantial amounts of money in such businesses, and states deem the protection of such franchisees (against terminations of rights without cause) a public policy issue. Moreover, franchises may be regulated like investments and investors (i.e. franchisees) may, depending upon the state jurisdiction, be required to receive substantial detailed and accurate information prior to entering into the franchise agreement or the franchisor may be exposed to liabilities.
IP refers primarily to patents, trade secrets, copyrights, and trademarks. All of the foregoing IP can be licensed. With this said, it is advisable to ensure your company has registered or otherwise recognized IP rights in the U.S. prior to licensing any such rights to a U.S. party.
To understand the concept of IP licensing, let’s take the example of a Scandinavian medical device company owning patents to a surgical instrument. The Scandinavian company can manufacture the instruments itself and ship the same to the U.S. (for instance, to, as discussed above, its Subsidiary, a third-party sales rep, a third-party distributor or even directly to a foreign customer—provided applicable laws and regulations are respected).
Alternatively, the Scandinavian company may grant a patent license to a U.S. company whereby the U.S. company can manufacture the instruments itself (locally or, if permissible, in another country) and then sell the manufactured instruments in the US. In this scenario, the U.S. patent licensee will generally pay a royalty to the Scandinavian patent licensor and such royalty will accrue on a per-unit basis, for instance when each instrument unit is manufactured, shipped or sold. The instruments may or may not be sold under the patent owner’s product name—all depending upon whether the patent license permits private labelling of the instruments. With this said, patent owners will want to ensure strict compliance with all design specifications in producing such instruments—in order to ensure of product quality especially in those cases when the patent owner’s product or company name will be associated with the instruments produced by the foreign patent licensee.
As mentioned, the method your company chooses to reach the U.S. market should be based on an informed decision. Such methods can be direct or involve one or more intermediaries. The key issues that must be prioritized are safeguarding any and all IP, the mitigation of U.S. tax and legal exposure, ensuring incoming payment obligations are clearly defined and can be reasonably enforced, administrative ease, scalability, and that such approach does not impede your company’s global roadmap for business development.