August 26, 2013Protecting Your Online Business With 'Exclusive' Agreements
By Cliff Ennico
I buy a fashion accessory at the full retail price, directly from the manufacturer's own retail store, and then resell them on Amazon and eBay where, believe it or not, I make money. The only official way to get this product as 'new' in the United States is through the manufacturer. They know exactly what I am doing, as this is not a product a customer orders hundreds of at a time every two weeks. In fact, on their Facebook page, when they are out of stock or need shipping to Canada, they direct customers to my eBay or Amazon pages.
Of course I have asked them a million times for a volume discount, but they will not give me one. To be honest, I started selling a half dozen of these on eBay to make some beer money, but it has grown beyond my wildest expectations and now about one in 20 of these sold in the United States goes through my hands (judging by the order numbers I get).
The money is great; it is not hard work, and I am good at it. But I'm always looking over my shoulder for either the manufacturer pulling the rug out from under me, or worse, a lawsuit by the manufacturer.
Neither the manufacturer nor I make any warranties, express or implied, on this product. The manufacturer does offer the product from its own website, but my return policy is significantly better than the manufacturer’s own (and its customer service gets awful reviews online).
I know I can grow my sales easily. With a little advertising, I can direct more customers to my Amazon store. I have also considered setting up a separate eCommerce site and selling them there to avoid commissions from Amazon/eBay, but that may put me at greater risk of trouble with the manufacturer.
If you could comment on what my risk is and anything I can or should do to protect myself I would appreciate it.
Folks, if you don’t yet believe in the power and potential of "retail arbitrage," please re-read the above message.
I wouldn’t worry too much about a lawsuit here; if the manufacturer is directing buyers to your online stores, they will have a hard time proving that your activity damaged them in any way. Your online activities have been pretty notorious, and they can’t seriously argue they didn’t know what you were doing when you are buying hundreds of items every week.
Your biggest risk here, as you correctly point out, is that the manufacturer is offered a better opportunity for online distribution and cuts off your source of supply for this product, rendering you unable to sell it.
What you need here is not so much a "volume discount" as an "exclusive distributor" relationship with the manufacturer. This would guarantee you a steady source of supply, and enable you to build your business with confidence, at least for a while. You would buy the product for an agreed-upon price, in agreed-upon minimum quantities and at agreed-upon times (thereby guaranteeing the manufacturer a certain volume of sales), and resell it for whatever you can get online (legally the manufacturer cannot dictate your resale price).
The toughest negotiating point with the manufacturer will be the scope of your "exclusivity." Your exclusivity could cover "all online sales" or only "online sales to customers in North America." In either case this will force the manufacturer to cease selling the product online from its website, which it may be reluctant to do, especially if it has other merchandise. You might, however, be able to talk them into forwarding all inquiries for the product to you for processing.
As for the term of the agreement, I would ask for five years, with automatic renewals. Be sure the agreement covers any new "versions" of this product, and any complementary products the manufacturer may offer as part of the same product "line."
If you want to be really aggressive, you can ask the manufacturer to grant you a license to the products’ patent or other intellectual property, which would give you the right to have it manufactured by someone else if this manufacturer decides to discontinue the product for any reason.
If the manufacturer won’t agree to an "exclusive" distribution agreement, you might want to consider buying large quantities of the product at regular intervals of time anyway so that, as a practical matter, the manufacturer becomes dependent on your business. You are, after all, paying full retail price plus sales tax for each purchase.
Your bigger long-term problem with this business is that you have become too heavily dependent on one product, and one manufacturer. The safest way of managing this risk is to diversify your product offerings online to include similar merchandise that people might want to buy along with this product, but that doesn’t compete directly with the manufacturer’s other product offerings. If, of course, that’s possible.
Cliff Ennico (SucceedingInYourBusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller's Tax and Legal Answer Book, and 15 other books. COPYRIGHT 2013 CLIFFORD R. ENNICO. Permission granted for use on DrLaura.com.
Posted by Staff at 3:30 PM