International Trading Rules and Tricks
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| International trading rules and tricks |
Target Audience
This international trading guide is made for Saudi entrepreneurs willing to work in trading with regional or international trading companies. The section of legal articles applies to all countries as it is generic to international trading.
It is not intended for contracting, as we will dedicate another article for contract articles below in order not to make this article very long.
The major difference between trading and contracting is that trading can be limited to financial transactions between you and your partner to buy his products and services without him being involved locally and providing his services by mobilizing his team to your country. That means products exceed services in terms of quantities.
This is also made for business entrepreneurs who established a business and know what to include in their commercial register activities and the other governmental documents.
It is very important to follow the advises mentioned here because, from personal experience and point of view, I worked with a lot of famous businessmen who didn't have an idea about how to handle trading problems when they occur and they were obliged to pay huge amounts of money on things they could avoid by building a strong infrastructure from day one.
What is Trading
By definition, trading is the action or activity of buying and selling goods and services between two or more organizations.
The name of the action resulting in the trade is named Trade, thus trade involves the transfer of goods and services from one person or entity to another, in exchange for money.
Government Authorities Involved During Trading Cycle
Here's a snapshot of all the possible government authorities that might be required for processing your licenses depending on your trading business.
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| Government Authorities Interaction Matrix |
Legal Forms of International Trading
Once money transactions will be involved in your business, you need to make sure that you are transferring or receiving money through the right channels. You also need to make sure that you have a safe monetary infrastructure that can protect you from fraud, money laundry and other illegal acts.
We will dig more into the protection of both parties once we talk about the legal and contractual articles of your agreement with the international partner.
Here are the most used forms of agreements related to international trading:
1- Memorandum of Understanding (MoU)
A lot of traders/businessmen prefer to start with a general testing agreement just because the due diligence could be incomplete and there are still grey areas not clear for one of them or for both. This form of trading can be translated into a Memorandum of Understanding.
This type of agreement is usually very basic and it lists the obligations and responsibilities of each party during a certain period while maintaining the best business practices and norms, as much as possible, where both parties exert all their efforts to reach another stage of agreement as per below.
This is, most of the times, an amicable way of dealing with the business relationship and it does not involve many authorities to testify/authorize it in all parties' countries. Chamber of commerce in corresponding countries can certify the agreement by stamping it.
2- Reseller Agreement
This is sometimes called Value Added Reseller or VAR Agreement, and it involves a more serious articles in terms of commitment.
Your role here will be to sell the products and services of your international partner, so sales quotas or targets will be defined to condition this agreement rather than making it open and unlimited.
The articles of this agreement should define the targets clearly and precisely with time frames acceptable to both parties, as well as define the exit strategy for each party.
This legal form should involve the local related authorities in Saudi Arabia including the Chamber of Commerce in your city, the Saudi Customs and the local Port/Airport authority that will facilitate the entry of international products to your country.
3- Distributor Agreement
For this agreement and the next one, try as much as you can to use the provided templates below as a startup agreement and develop it on a case by case basis with your partner.
This form of agreement is the most acceptable and safe agreement for trading as it involves a lot of local authorities to certify it due to its importance and criticality.
The main authority legalizing this document is the Ministry of Commerce and Investment, and they have all the necessary laws and regulations available online for it.
This Ministry will be responsible to distribute the products list agreed in the distribution agreement to customs for them to protect the imports of same products through illegal or unauthorized channels. So, if you signed an exclusive agreement with your partner, and somebody else tries to import their products to the Kingdom, they will not be allowed by the Saudi customs authority.
Other authorities involved will be the Ministry of Justice or equivalent in each country, the Saudi Embassy in the other party's country and the Saudi Ministry of foreign affairs locally. Their corresponding stamps should be available before going to the Ministry of Commerce and Investment which will be the final party to release an agency certificate for your company.
Obligations and responsibilities of each party should be highlighted clearly here, not on your company letterhead, not on the other party's company letterhead, but on blank letterhead.
Here's a link of the distribution agreement template that is recommended by the Ministry of Commerce and Investment: Link
Also, here's the website of the corresponding laws and regulations section online: Link
4- Joint Venture Agreement
This form of agreement is the most intimate and intense among all others and it has to be studied very carefully with your partner.
Once you reach a level with your partner to convince him to invest in your country, that means the relationship is successful more than a marriage relationship. Thus, it should be handled carefully with the presence of lawyers from both sides to study the articles and consequences of each major action.
The procedure of this type of agreements is governed by a unique government entity under the Ministry of Commerce and Investment named Saudi Authority General Investment Authority - SAGIA and here's their website: Link
SAGIA is one of the best facilitating authorities worldwide and it is always advancing and using the latest norms and practices to create a unique and challenging environment for investment.
The implemented programs (Tayseer and Meras) can establish a company existence with all the required documents and with all the necessary authorities within one day - if you submit your papers as per their requirements.
Foreign investors can come alone to invest in the Kingdom or together with a Saudi partner. It is recommended that you, as a Saudi entrepreneur or investor, bring an international investor having a know-how for production, so that they build a local factory and share all profits with you.
By this agreement with an international partner, a new company will be established with its own capital, owners, board of directors, executive committee, and I insist on having your dedicated lawyer which can save you a lot of mis-understandings in the future.
Articles like percentage of income shares and board resolution, new company name, and a lot others similar to the article of association can be incorporated here as a pre-understanding between partners and to facilitate the incorporation issues in the corresponding ministries.
It's preferred to have a pre-feasibility study, done by you and your partner together, if you decide to transfer the manufacturing know-how of your partner locally, before signing the JV agreement. Your partner can provide you the basis for the technical and financial parts, and you can do the marketing part. The pre-fesibility study will help you a lot to apply for loans for the business from the well-know government authorities, if required.
You need to be aware of the cost of capital required for each type of investment imposed by SAGIA as well as the 20% fees to be paid by each foreign investor from the net profits before distributing dividends.
Here's a link for the JV Agreement template which you can rely on to build up your own: Link
Rule #1: Study Your International Market
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| International Trading Preparation |
Assuming you have opened a business, you know your local market competition, you have completed your business plan and now you want to target a new international partner to add value to your business with new products and services.
You're in this business and you definitely have a list of potential international partners to connect with. My advice here is a rule of thumb: consider this partnership as a marriage relationship for ever. The key is to know your partner from all aspects.
If you don't have this list, it is very easy to search Google for companies working in the same field and start contacting one by one. I suggest to dedicate the efforts of your business development team to prepare an Excel sheet and list the potential partners by mentioning their pros and cons for each, and evaluating the probability of partnering them.
Communication with potential partners should start by email and phone calls, possibly through online video conferences as chemistry is very important in international trading, and body language, mainly the face language is a key of success. From the first video call, you can expect if the partner will proceed or not.
Invest in available communication technologies to reach the right selection, arrange a series of webinars to understand the product or service they are providing. Give them insights and statistics about your local market to challenge them to partner with you. They will feel your enthusiasm from sharing your market study.
Selection passes through a criteria flexibility filter, until you select the right one for you and move to the next steps.
Rule #2: Know Your Partner
Now that you have selected your preferred partner to team up with, you need to invest in understanding their whole culture by traveling to their country and spending one to two full days in meeting their principals and all potential key persons who will be in direct contact with your team; And that's before signing the agreement with them.
They need to see that you are adding value to them by this trading relationship. They need to see you prepared, with good knowledge of your market situation, investment facilities if required, taxes and policies, as well as SWOT analysis. I personally prefer to draft an business plan and share it with them during your trip so that they can plug their logistic and financial considerations and give you the right input to proceed.
As a matter of personal experience, I prefer in the case of JV, to invite your partner to visit Saudi Arabia rather than traveling to their countries for a simple reason, they are investing in your country and it is a must to invite them for a week or so, to give them a tour in the country and make them feel the fertility of the investment opportunities. Be generous with them and dedicate your time as well as your team's time with them as they want to see and feel the seriousness.
In case of non-JV agreement, it is mostly preferred that you travel to their company's headquarters as you will be investing in their products or services, not the opposite.
Of course, if the budget of all parties is enough, you can arrange to visit them and invite them as well. Time is not lost in such type of relationships, you will definitely learn a lot from such experiences.
Rule #3: Legal Articles You Must Include
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| What to Include in Agreement Articles |
When legalizing the relationship between you and partner, you need to cover all the grey areas of cooperation before the clear areas. It is recommended that you use government templates, as provided above, and elaborate as much as you can to cover the following subjects:
3.1 Agreement Effectiveness and Termination
These are two separate articles that define the start and end of your relationship, so make sure that you define precise dates and extend the duration to more than one year, as most partners will prefer to renew automatically after one year duration, if everything is going right.
During the first year, no matter how you close deals and make profits out of your agreement, there might be some obstacles that you face during your operations, so you want to give yourself another chance by enabling the automatic effectiveness renewal unless stated in writing by the requesting party, to terminate the agreement.
As for termination, make sure the exit strategy is detailed and clear. Elaborate as much as you can and imagine multiple scenarios of exit that suit you and your partner. Make sure that your partner will continue to ship the pending the orders that were effective before the termination request. Also, make sure that profits are distributed proportionally as agreed for the sales orders requested between the termination request date and the termination effectiveness date.
3.2 Agreement Governance
This is a very important article that need to be elaborated and you, as a Saudi entrepreneur, need to push as much as you can to have the governance under the laws of the Kingdom. By this governance, you can make sure that the rules and regulations of operations are all controlled by your government and not your partner's government.
Principals of the Ministry of Commerce, and mainly for distributor agreements, will advise you a lot about this article as it will save a lot of your efforts for grey areas uncovered by the agreement, whenever it happens.
If you couldn't convince your partner with local governance, then this is an additional homework for you. You need to review and check the governance rules of their country before agreeing to the article content. The governance article might look simple and easy to understand but you don't want to be dragged in European courts for not following some governance rules not mentioned in the article, but was your duty to know them because they are internationally known to be abiding.
3.3 Disputes
Another article that need to be taken care of, is the disputes and resolutions in courts. Each party will try to push as much as they can for their courts resolutions. A lot of international partners will provide you their own agreement templates which include by default, the resolution to be governed by their countries.
As a Saudi entrepreneur, you can play a smart game here and suggest an escalating procedure like the following: When dispute is detected between parties, they will try to solve it amicably. If not possible, then it will be solved in the Saudi courts. If the international partner did not agree to the court resolution then it will be submitted to the partner's court in his corresponding country. If you don't agree to the court resolution, the case will be submitted to a neutral third party court in Dubai or Malaysia or any country where neutral courts are available and that are governed by the International Chamber of Commerce.
3.4 Sales Quota, Targets And Training
When the agreement is effective for a certain period, some partners include a testing period for 6 months or more, where they check if you can meet a certain quota of sales. You need to make sure that all parties define the quotas and targets reasonably and precisely.
You don't want to push yourself and your sales team unless you make sure they are trained very well on the agreed products. Thus, make sure that your team gets a intensive sales and technical training online or on site or by traveling to the partner's country, if the budget allows.
Quotas and targets are better to be defined for each product as the market might be ready for some of them not all. You can create a formula that opens a door for compensation between one product and another, so you can exceed your quota for some products and have shortage for others.
3.5 Exclusivity
Exclusivity is always a success key in the Saudi market. Make sure to protect your efforts by convincing your partner to include it from day one.
You cannot expect how many other partners would be working on the same products with the same partner and you will be surprised of the competition problems that arise. You are already competing with other market players of similar products and you don't want to add another competition for the same products.
This can give a bad indication in front of the clients, especially if you approach the same client with another Saudi company having the same products. Some international partners will add an article statement that they will protect the local partner's clients if you submit your clients in advance, or by dividing the market by industry or by region. All these strategies wont work, and the exclusivity will solve all potential problems and let you focus on the natural competition.
3.6 Warranty for Defects and Shipping Terms
These are two separate articles but they are related somehow when we dig into the defects caused by shipping not from the source or the manufacturer.
The shipping procedure should be agreed in advance with your partner. You need to have your own network of shipping agents and freight forwarders. This is for the purpose of client's satisfaction which is the main reason of your business.
Today, thousands of organizations, institutions, and enterprises provide supply chain courses and materials in order to make sure that products reach clients with complete satisfaction.
Return and replace policies are included and you need to make sure how to investigate about the source of defect and location. A complete report should be generated and submitted to the partner and for the "angry" client so that you act accordingly for the purpose of client's satisfaction.
What's Next?
After reading this article, if you still have any clarifications or questions, please do not hesitate to contact me directly by dropping a message in the Contact Us form.
The provided templates are just a basis for your international trading gateway. There are additional subjects that can be raised related to the payments, payment terms, force majeure, and others but we cannot cover everything in one article only.
Websites to check for additional useful resources:
