Wednesday, January 5, 2011

Supplier Knowledge - How Companies Are Organized

To understand who to buy from, you need to know how companies are organized, how they operate financially, how they sell and the impact that has on your negotiation.

How companies are organized

A large multinational company will have numerous subsidiaries with different physical addresses. In addition they may also have a number of different "paper companies", which may exist in offshore tax havens, that serve as holding companies of these different subsidiaries. For example, a multi-national company could consist of:

  • The Parent Company
  • Multiple financial holding companies
  • Sales companies or sales subsidiaries
  • Manufacturing companies
    • Each manufacturing location may be a separate company.
  • R&D companies.
  • Service companies.
  • Financing companies
  • Insurance companies.
  • There may also be companies that provide services for all their Subsidiaries

Subsidiaries may be wholly owned (where the Parent Company or Holding Company owns 100% of the stock in the Subsidiary) or the Parent Company or Holding Company may own a controlling percentage of the stock (more than 50%). Ownership in Subsidiaries may be controlled by requirements of the Countries in which the subsidiaries are headquartered which may require a certain percentage of local ownership. 

Companies are organized this way primarily for two reasons. One is to manage risk and potential liability, The other is to manage taxes. For example, if a Supplier has a high risk operation, they may choose to establish that activity in a separate company. Then if something happens, the remainder of the Supplier’s companies will be insulated from the problem and risk.

Each Subsidiary is an independent legal entity with it own Board of Directors who are responsible to manage that Company's Business. Since the Parent Corporation and all their Subsidiaries are all legally independent companies, the Parent Corporation cannot bind the Subsidiaries unless the Subsidiaries legally agree. Subsidiaries cannot bind the Parent unless the Parent has provided that authorization. One Subsidiary cannot bind other Subsidiaries. For each to be a party to the other's contracts, they must legally agree to be bound to it. For a Subsidiary to be bound to the Contract, they must be either a signatory to the Contract, or they must have a separate Contract saying that they agree to be bound to those terms. For a Parent to be bound to a Subsidiary's contract, they must be a signatory to that Contract. For a Parent Company to be legally or financially responsible for Subsidiaries, they must formally agree to that through either signing the Contract and agreeing to be “jointly and severally liable” or by providing a form of Company or Parent Guarantee which makes them responsible for the debts of the Subsidiary.

A common mistake made by many Buyers is thinking that there is no distinction between companies of the same basic name, when each subsidiary and possibly each location is a separate legal entity. In negotiations it is important to identify exactly which Supplier company the Contract is with by including the correct Supplier legal name, place of business, and the location of incorporation. It also important to ensure that the company your contract is with has the resources and assets to stand behind the commitments of the Contract because many subsidiaries may not, and we’ll see why when we talk about the way companies are structured financially.

What if the Contract is with one Supplier company and you are buying from another? The simple fact is the terms of the Contract do not apply and your purchases will be per your Purchase Order’s terms. If you want the terms of that Contract to apply to those purchases, the Subsidiary you are buying from must accept those terms to be bound to them. If you refer to that Contract in your purchase order, you would be incorporating those terms by reference, so if the Supplier accepts the order, they accept those terms. If you do a large amount of business with the Subsidiary, you could also enter into a contract where they formally agree to accept those same terms.

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