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Online Sales, Export Opportunities and Due Diligence…Oh My

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Jean G. Schtokal
Foster Swift Business & Corporate Law News
June 12, 2017

Businesses receive online orders from international entities through their websites all of the time. It is important to have your team in place to investigate these offers and make sure they are legitimate requests and that you can legally fulfill the order, before too much time and too many resources are expended.

We were recently brought in by an international banker to help a newly formed US company that was selling its product online.  The product was a very unique, niche product that outperformed all current solutions. The internet sales of this product in the US were starting to take off. A growing number of individuals were buying a piece at a time for personal use, and some retail outlets were occasionally ordering a few at a time. And then, via the email listed on the US company website, a request for pricing of 60,000 pieces came from China.

The US business owner was rightfully excited, provided a quote, and started the process of lining up financing to manufacture the product. Jean Schtokal was called in to assist with drafting of an international sales contract. As a first order of business, for a couple of reasons (including the fact that the email address used by the customer contact was not exactly the same as the potential customer), Jean recommended vetting the customer in China and called in Lancaster Management Consulting (Shanghai) Co., Ltd. for boots on the ground to check out the potential customer.  Alex Claypool and Li Xiao from Lancaster looked at the potential customer in China and a few issues came to light:

  1. The US company was never given the Chinese name of the company. Businesses in China have legal Chinese and English names. It is required that a business in China have a Chinese name, and it is this Chinese name that the company business license, etc. will be tied to. Although Alex and Li were able to talk to the potential customer on the phone, they could not get the customer to produce a copy of its business license, a very common request during a sales transaction in China, which would give us their legal name, making it easy to do a background check.
  2. The potential customer did not want to meet in person. The customer did not want to meet in person, and listed a high rent office building in a second tier city in western China as their address. The office building, however, did not have the customer listed as the tenant.
  3. There was no request for samples or discussion of warranty. 60,000 units of this particular product is a very large single order. However, there was no request for a sample or discussion of warranty.

At the end of the day, a number of things just did not add up.  Having a knowledgeable team on your side as an exporter can save costs in the long run.  The time to do vetting of potential foreign customers or international distributors is before you quote, line up financing, increase production, and expend legal fees on contract drafting and properly papering the transaction.  This is not quite what you would call a happy ending — but it’s a much happier ending than if the vetting was done after product was produced or had shipped and the US manufacturer was owed payment.

According to the US company, “To secure the start-up loan to pay for manufacturing, we were going to put up significant personal assets as collateral.  To lose in a fraud would have wiped us out.  What you save me by your valuable effort is huge.  Frankness is expected in a legitimate business agreement and the lack of it here was a red flag.  What you did for me is made me look at the details first.  It was there that the story didn’t add up.”

In our upcoming newsletters this year we will feature some of our outside team members, like Lancaster Management Consulting. It’s the way Foster Swift adds value to your business and bottom line, beyond the nuts and bolts of legal analysis.