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As a new entrepreneur, you’ve surely already heard the term ‘exclusivity agreement’ being thrown around in the business world. While its name surely gives away some of the meaning, what it implies for you and your business might still be ambiguous. So, what exactly is an exclusivity agreement, and should you sign one with your distributor?
What Is an Exclusivity Agreement?
According to Thomson Reuters Practical Law, an exclusivity agreement is signed between two parties, and it ensures constant collaboration between them over a fixed period of time. It is also known as a shut-out, lock-out, or no-shop agreement, as it protects the client from being outbid by competitors because it limits negotiations.
Exclusivity agreements are very common in the retail business, as well as other fields that deal directly with distributors. They establish the terms of a commercial rapport between companies, and they can have varying degrees of specificity. To better understand how such a contract functions, read more details and check out a few standard templates that might help you better your business practices.
The Essential Aspects to Consider
Signing an exclusivity agreement with your distributor of choice comes with its benefits. You will be able to regulate every single aspect of the selling and buying process, and you will be provided with high-quality services. However, there are some things you need to consider before doing so. Here they are, in no particular order.
- Seller qualifications. Many new distributing companies try to build their client base with attractive offers. While requesting the services of such a seller can have its perks, it’s important to assess whether or not it possesses the necessary qualifications for catering to your business needs. Thus, it’s essential not to be blindsided by discounts and other bonuses and focus on what matters.
- Territorial coverage. After vetting out candidates that don’t have the necessary experience to cater to your needs, it’s time to take a look at the territorial This is something you and the distributor need to define together, as you may assign various areas for them. These can be defined in terms of customer, industry, geographical area, or jurisdiction. Listen to the stipulations of the seller and propose your own. This is also the moment to establish how breaches should be dealt with if they occur later on.
- Price restrictions. It is common among distributors to request limitations in terms of price adjustments in the contract over a certain period of time. This is understandable on their part, but it is also your right as an entrepreneur to deny this request. Keep in mind that your suppliers might raise prices for various materials, which creates the necessity for your business to do the same in order to turn a profit. If the terms of your exclusivity agreement do not allow it, you will come out at a loss.
- Purchase and order handling. Another thing that needs to be clearly established between you and your distributor before signing the exclusivity agreement is the methodology for handling purchases and orders. What will be the protocol for accepting or rejecting them? What happens in the eventuality of a cancellation? How will the payments be sent out and processed? All these things will have to be outlined and discussed in depth so that both you and the seller cover your backs. What is more, you also need to set a minimum purchase value or quantity at this point and stick to it.
- Post-exclusivity clauses. Finally, you will need to discuss what happens if and when your contract comes to an end. Even when you carefully filter out unsuitable candidates and stick to a company that is in line with your business etiquette, things may not work out for one reason or another. Even if that won’t be the case, your collaboration can still run its course naturally when one party or the other is in need of a change. When this happens, you need to be covered. How will the termination of the agreement be notified? What should the distributor do with excess stock? These, and many other things need to be thoroughly evaluated before sealing the deal for good.
Finding a distributor that you trust with selling your products is a challenge, which is why signing an exclusivity agreement gives you a definite edge over the competition. However, if you want to stay on top of your game in the business world, you need to consider some things before attaching your name to the contract. The abovementioned factors are something to mull over carefully before grabbing that pen and inking the arrangement.