WHEN TO USE AN EXCLUSIVITY AGREEMENT IN A TRADING PARTNERSHIP AND THE 6 IMPORTANT POINTS TO INCLUDE
As a business there is nothing more exciting than the possibility of a new partnership. If you are a brand (buyer) marketing products, you need unique and high quality goods to keep your customers coming back. If you are an artisan business (seller) creating products, you need brand partners who can deliver the market and bring in sustained orders that keep your business viable. So if you both want the same thing, a successful partnership with thriving sales, why is it so important to craft an exclusivity agreement? Because unfortunately good intentions don't always turn into fruitful business. The path to a successful partnership starts with clearly defined terms and, when appropriate, an exclusivity agreement as to which products are or are not going to be exclusive to your trade partnership.
It's always important to start by sharing your company's terms. These are the things you require of any partner you trade with. It is fine to start most relationships by simply agreeing to one another's regular terms and testing with products from the seller's current offerings. Buying from a seller's open stock list typically does not require an exclusivity agreement unless the buyer wants the right to be the sole distributor of that product or line inside her/his particular geographical region.
I suggest testing your new partnership with a non-exclusive test order from the seller's regular line (or with small product tweaks) where the buyer gets to be sure the seller delivers on time, well packaged, quality goods that are meet their market's standards. This also allows the buying brand to test the products with their customer base as a springboard for deeper partnership. A non-exclusive test order lets the seller see if the buyer pays in a timely manner, is easy to work with, provides clear instruction during product development, is helpful in the import/export process, and how the buyer tells the story of the items or the artisan makers when marketing the final product.
Once the partnership has been established there may be good reasons to enter into an exclusivity agreement. A simple agreement can define all of the important questions that may come up during a business relationship. The document can be used around a single product or line or as a general distributor agreement. It is vital to craft an agreement that is beneficial to both parties. Here are the most important things to cover in your exclusivity agreement:
Which products will be exclusively produced or distributed in this business relationship. Sometimes a buyer becomes the sole distributor of everything a seller makes for a geographic area, but more often exclusivity agreements are built around one product or one product line that the buyer has the exclusive rights to sell in a particular location. The same may be true for a product the buyer has designed. The seller may become the sole producer of that product or the buyer may use multiple sellers to make their product design. Define the products included and also those not included in the agreement.
Who designed the product or line that will be referenced in the exclusivity agreement? When the term of the agreement ends the party who provided the original design is the owner of the design rights. For example, the seller may develop a line of jewelry that the brand buyer discovers on a buying trip. The buyer wants to be the sole distributor of the seller's products in the US so they enter into an exclusivity agreement for distribution. When the term of the agreement ends, if it's not renewed, the seller owns these designs and can sell them to someone else in the US. On the flip side, a buyer may create a design and provide the design spec. The buyer may have their design sampled by multiple artisan groups. Once they find the right artisan business to produce their design they enter into an exclusivity agreement with that seller. When the term of this agreement ends it is the buyer who owns the design rights and can have their product produced by a different artisan business if they chose to. If you are dealing with a mix of design rights, some belonging to the seller and some to the buyer, I suggest listing which designs belong to each party if they represent a significant piece of your business.
What area of the world does your agreement cover? Does the buyer have the rights to distribute the seller's product in one country, multiple countries, or the whole world? If the seller owns the design rights, I suggest limiting the geographic area to the market where the buyer is strongest. If the buyer owns the design rights, the buyer has the global right to the product. If a buyer in another region of the world wants to sell that product the seller needs to ask permission from the original buyer with the design rights who can grant or deny permission to sell that product to another buyer.
There should be a defined promise of a minimum volume of product or money in order to make the exclusivity agreement worthwhile to both parties. The buyer should make a purchase commitment in pieces or in a monetary amount they will buy for the year. The seller should commit to the production time frame and delivery of the agreed upon volume. The two businesses should also talk about the seller's maximum capacity and make a plan should the demand exceed the seller's capacity. If demand exceeds capacity will the seller expand production, outsource production, or can the buyer have a second seller do the extra production? Who will pay the equipment or other expenses associated with the additional demand. Both parties should consider if this demand will be short term or long term and make their decisions accordingly.
How and where will the products be sold? Will the brand use the artisan business's story as part of the marketing? If so, the artisan business should provide the information they would like used and any guidelines. Will there be shared credit for the product, transparency of who made or designed the goods? How will the products be tagged? It is assumed that the brand buyer will pay 100% of the marketing costs, but this can be included in the agreement and their can be variations. Buyers should list the channels, trade shows, or events where products will be sold. The two parties should also include how the products and their partnership will be promoted on social media and whether or not both parties can post photos or updates.
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Exclusivity agreements should be subject to a set time frame. One year to two year agreements are the most typical. I do not suggest getting into any agreement that exceeds three years, since business is ever changing and neither party should feel stuck in an agreement that no longer serves them. If the agreement is working well for both parties and the terms are being met then the agreement can be renewed annually.
Brand buyers and artisan suppliers work together to bring beautiful and impactful products to the market. Setting up terms and agreements that value, benefit, and grow both businesses is good for everyone.
*Disclaimer: Neither this post nor the downloadable example agreement should be considered legal advice. For legal advice consult a licensed attorney.