Reseller agreements 101: a beginners guide to navigating resale relationships
Reseller agreements provide a framework for collaboration, sales and distribution of products, enabling suppliers or manufacturers to scale their business and reach new markets. However, crafting a comprehensive and effective reseller agreement requires careful consideration and attention to detail.
In this ultimate guide, we will walk you through the essential elements of creating a reseller agreement that not only protects your business interests but also facilitates a successful and mutually beneficial relationship with your partners.
What is a reseller agreement?
A reseller agreement, also known as a product resale agreement, is a legally binding contract between suppliers or manufacturers and resellers, enabling them to engage in product resale across new territories. It outlines the terms and conditions for reselling products at wholesale or retail levels.
The reseller will first buy the products from the supplier and then resell the products to the reseller’s own customers in a particular geographical area.
Examples of reseller arrangements:
A German car company (the manufacturer) selling cars to a German car dealer (the reseller) who will then resell the cars in Germany.
A French importing company (the reseller) purchasing toys from a toy manufacturer in China (the supplier) to resell them to wholesale retailers in the UK.
An English software company (the reseller) selling licenses to a particular type of software owned by another English company (the software manufacturer).
The benefits of using a reseller agreement
Control over the distribution of products
If you’re a supplier/manufacturer appointing a reseller, you have the flexibility to choose between sole rights, exclusive rights, or non-exclusive rights (we take a deeper dive into these rights below). The decision on the type of appointment rights given empowers you to determine the level of exclusivity the reseller has in the agreed market. You also have the ability to agree to the type of sales channels and territory in which the reseller will be permitted to resell the products.
If you’re a reseller, using a reseller agreement allows you to sell a third party’s products with their support, without the need to manufacture your own products. It protects the reseller’s profits by setting prices and preventing the supplier from undercutting them, and if agreed, offers marketing materials and support from the supplier. In some cases, the agreement may give the reseller exclusive rights in certain areas which reduces competition within that region.
Expand into new markets
Collaborating with resellers opens doors to increased sales and a broader customer base in new territories and larger markets for suppliers. Resellers possess in-depth knowledge of their respective territories, granting them access to established sales channels for successful product resale. Partnering with resellers eliminates the need for local market expertise or a physical presence in the territory, thereby expanding the supplier's reach.
Protect your intellectual property and confidential information
A company's intellectual property (IP) is a valuable asset, making it crucial to clarify ownership rights in the reseller agreement. It is essential to avoid accidentally transferring all IP rights to the other party. The reseller agreement must explicitly state each party's continued ownership of their existing IP. Additionally, the agreement should outline whether a party can use the other's IP (e.g., trademarks) for marketing and selling the products. The reseller agreement can also define the ownership of any new IP created in connection with the products after the reseller purchases them for resale. For more information about protecting your intellectual property and mitigating risks, check out this blog.
Increase sales while reducing costs
Selecting carefully curated resellers can significantly impact sales and enable the supplier to focus on manufacturing and supplying products in their territory. Suppliers can enforce a minimum purchase amount, requiring resellers to buy a specified quantity of products within a given timeframe. This arrangement ensures the supplier receives payment for the agreed-upon products.
Key elements of a solid reseller agreement
Whether you’re reselling products, or you’re supplying your products to the reseller, a well-drafted reseller agreement can protect your business and lay the foundations for a successful collaboration.
Let's delve into the essential elements that form the backbone of a robust reseller agreement.
Resale terms and order process
The terms of reselling and the process for ordering are the heart of your reseller agreement. This section of the reseller agreement should grant rights to the reseller to sell the products, and clarify exactly for how the reseller will sell the products, including any geographical limitations, specific territories for sales and distribution channels.
The reseller agreement should also clearly define the rights and responsibilities of each party. You can do this by thinking about what each party will be required to do under this engagement, from placing orders, order quantities, inventory management, customer support to marketing efforts - it’s important that everyone is on the same page on their duties from the outset.
As the product owner/manufacturer, you may want to ensure that your reseller agreement does not inadvertently force you to commit to providing products to the reseller if you are unable to for any reason. It’s therefore important to carefully draft the order process terms according to how you envision the process to play out in real life, and don’t over promise if there’s a chance you may underdeliver! On the other hand, if you are the reseller, you may want to include terms that require the supplier to supply any products that you order, to ensure you are able to fulfil your obligations to your end customers.
By ironing out these details upfront, you can avoid misunderstandings or disagreements down the line.
Pricing, payment terms and profit margins
By their very nature, reseller agreement relationships are a win-win situation! A supplier/manufacturer wants their reseller to succeed, but they also need to be profitable too. For this reason, finding the sweet spot for pricing and profit margins is essential. It's important to be fair and realistic when negotiating profit margins, ensuring that both parties benefit from the partnership.
Setting out crystal-clear payment terms is vital for a harmonious reselling relationship. Outline purchasing prices from you (the supplier) and the resale prices to their end customers or retailers. Be sure to include payment methods, invoicing procedures, and schedules, ensuring a smooth flow of funds.
Sole rights: This grants the reseller the exclusive right to distribute in the agreed location, while the supplier/manufacturer also retains rights. It proves advantageous for both suppliers and resellers as it optimises the supply chain, and resellers can focus on their specific market without competition concerns.
Exclusive rights: With exclusive rights, the reseller gains exclusive distribution rights in the designated location. Resellers often push for this option if they have strong bargaining power, as exclusivity provides a competitive edge and allows them to set profitable prices without undercutting by competitors.
Non-exclusive rights: In this arrangement, the reseller has the right to resell, but the supplier can also appoint other resellers in the same location. Non-exclusive rights are favourable for suppliers or manufacturers as they can appoint multiple resellers to expand product resale in various territories.
For a deeper dive into different types of appointment rights in reseller agreements, check out this blog.
Minimum purchase obligations
Implementing clear purchase and performance requirements is a crucial aspect of reseller agreements, especially from the supplier/manufacturer's perspective. When creating a reseller agreement, defining the metrics for successful performance and setting a minimum sales target are vital steps.
From the supplier's point of view, setting a minimum sales target provides essential reassurance that the reseller is genuinely committed to actively marketing and selling the products. This commitment is significant as it ensures that the supplier's products receive the necessary attention and efforts in the market.
Moreover, the minimum sales target acts as a valuable tool for forecasting revenue and planning business growth. It allows the supplier to set achievable goals and monitor progress over time, giving them a better understanding of the product's performance in the market.
Overall, from the supplier/manufacturer's viewpoint, including a minimum sales target in the reseller agreement is a strategic element to monitor progress and forecast earnings from the reseller agreement. Our legal experts delve further into sales targets in these top tips.
Protecting your IP in reseller agreements is crucial for businesses. Typically in reseller agreements, each party will retain their own intellectual property, however, either one or both parties will license their IP to the other for the purpose of marketing and reselling the products.
Including IP provisions in reseller agreements ensure that trademarks, copyright, patents and other proprietary IP rights are protected. Additionally, if you have brand guidelines, it's important to ensure the reseller has an obligation to follow IP use guidelines to maintain a consistent brand image across different channels.
If you're a software supplier or manufacturer and you want to find out more about protecting your IP, check out this blog.
Although all reseller agreements are signed with the best of intentions for the future, it's wise to prepare for unexpected issues. Termination clauses allow the parties to end the reseller agreement prematurely without breaching the contract. The termination clause outlines certain scenarios where the parties will have the right to end the contract. It also outlines the consequences of terminating the reseller agreement.
Competition laws and VABEO: how they affect reseller agreements in the UK
As a business owner, you may have heard about the UK Vertical Agreement Block Exemption Order (VABEO).
VABEO is a set of regulations designed to ensure that vertical agreements (i.e. contracts between businesses operating at different levels of the supply chain, such as reseller agreements or distribution agreements), do not restrict healthy competition in the market.
The main aim of VABEO was to strike a balance between protecting businesses' interests and promoting fair competition in the market.
If a reseller agreement meets the conditions of VABEO, then the agreement will be lawful under UK competition law. For this reason, many reseller agreements will include an immediate right to terminate if a term of the reseller agreement no longer complies with the criteria set out in VABEO.
Compliance with competition laws
It is a business’ responsibility to ensure that its vertical agreements comply with VABEO and existing competition laws in the UK. This means that your reseller agreements should not unfairly impact other businesses or limit competition in any way. For more information about competition laws and how they may impact reseller agreements, click here. You can also check out the guidance from the Competition and Markets Authority (CMA) that's available on the Government website.
In conclusion, reseller agreements can create opportunities for both resellers and suppliers to unlock substantial growth and sales potential. By tapping into the reseller's robust customer base and potentially exploring new markets and channels, reseller agreements can lead to an increase in product sales and revenue for the supplier. Moreover, resellers' adeptness in handling the sales process and engaging with customers can ensure a seamless customer experience with minimal effort or involvement required of the supplier/manufacturer, whilst simultaneously enhancing the supplier's reputation and brand awareness.
By establishing clear terms and conditions that protect the interests of both parties, reseller agreements can set the foundation for a successful collaboration, providing the framework for a profitable business relationship.
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