By Cliff Ennico
How To Negotiate An Exclusive Distributor Agreement For Online Sales
“I have been selling merchandise on eBay and Amazon for some time. I would like to build a ‘brand’ for the merchandise that I sell, but I’m being told that the only way to do that (since I’m not the manufacturer of these goods, only the distributor) is to get an exclusive distributor agreement with each manufacturer so that I am the only person selling these goods on eBay and Amazon.
What do you think of this idea? If it’s a good one, how do I go about negotiating contracts with these manufacturers?”
Generally, it’s hard to build a “brand” online when you are not the manufacturer of the merchandise you sell. Most new sellers on eBay and Amazon make the mistake of selling goods that are “all over the map”. While this may be a good way to get started in online sales and “learn the ropes,” you won’t be able to grow an online selling business unless:
- you specialize in a merchandise “niche”; and
- you have merchandise that isn’t easily available elsewhere.
Unless you have an established track record of selling online, manufacturers probably will be hesitant to deal with you unless you show them you are creditworthy and have the expertise and sophistication to maintain their brand image online. Most large manufacturers won’t want to deal with you at all (they deal only with other big companies like themselves), but many smaller family-owned businesses may give you a shot at representing their merchandise.
If your manufacturers are willing to give you the exclusive right to handle their merchandise online, here are some of the key points you will have to negotiate with each manufacturer.
The Scope of Your “Exclusive Territory”. Will you be the manufacturer’s exclusive distributor for the whole Web? Only eBay? eBay and Amazon? You should seek as broad a territory as possible. Also, since people can access the Web anywhere in the world, you should not accept any sort of geographic boundaries on your activities (for example, “online sales to customers in the continental United States”), as there is no practical way to enforce them.
The Term of the Agreement. Once you establish an online “brand” for a manufacturer, it’s a sure bet they will be approached by other online vendors offering to do a better job than you can. To protect your investment, you should ask the manufacturer for as long a term as possible (I recommend at least five years), with options for you to renew for additional periods.
Will You Be Allowed to Carry Competing Merchandise? Just as you want an “exclusive” for online sales, your manufacturer may want an “exclusive” as well by prohibiting you from carrying their competitors’ merchandise. You should seek to keep these as limited as possible: for example, if a jewelry designer asks you not to deal with “any other jewelry designer”, you can respond by offering not to deal with “any jewelry designer who specializes in Celtic inspired designs.”
Will You Be Required to Purchase “Minimum Quantities” of Merchandise? In a “true” distributorship, you buy goods from the manufacturer at wholesale prices and then resell them online, keeping the difference as your profit. Some manufacturers will grant you an “exclusive” only if you agree to buy minimum quantities of merchandise each month or quarter. Keep these as low as possible, and negotiate a credit for any merchandise you return to the manufacturer that has been in your inventory for an unreasonably long time.
Will the Manufacturer Require You to Sell at Specific Prices? It is illegal for a manufacturer to dictate your resale price, or set a maximum resale price for their goods. The law is hazier on whether a manufacturer can set a minimum resale price. If a manufacturer engages in “minimum advertised price” or MAP pricing, you may have to go along with it. Just be sure that you retain the right to offer “clearance” prices for merchandise that is in your inventory for a long time if the manufacturer refuses to take it back.
Will the Manufacturer Agree to Notify Other Distributors of Your Exclusive Rights? Your agreement should contain a clause requiring the manufacturer to notify all of its other distributors of your exclusive online rights, specifically prohibiting them from selling the manufacturer’s goods on their own websites.
Here’s a final question you should ask yourself: how will you deal with “retail arbitrageurs” and other folks who circumvent your exclusive relationship by buying the manufacturer’s goods (legally) at retail and then reselling them online? If this is a serious problem (lots of sellers are doing this), you may have to send them nasty letters ordering them to “cease and desist” their online selling activities.
If only a handful of items are being sold through “retail arbitrage,” you may just want to ignore it. After all, it’s probably how you yourself got started.
Cliff Ennico (www.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. Follow Cliff https://twitter.com/cliffennico.