In the current economic climate, small and medium-sized businesses need to search for creative and novel ways in order to stay relevant. One approach that many businesses today take in this sense is initiating and closing exclusivity agreements.
In short, an exclusivity agreement is an arrangement between two or more parties to purchase goods and services from a predetermined provider throughout the duration of the contract. The foundation upon which such an agreement is closed is the understanding, and commitment, that the buying party will not, under any circumstances, approach other sellers, instead obtaining said goods and services from the participating party. Hence the ‘’exclusivity’’.
Now, some skeptics might say that an exclusivity agreement does nothing but bar the buyer from future growth opportunities. The answer, of course, is somewhere in the middle, aspects which we will be addressing in the following article.
The Basics of an Exclusivity Agreement (Clause)
To elaborate on what we have presented in the introduction of this article, an exclusivity clause (or agreement, the terms are interchangeable most of the time) is part of a larger document that restrict the signers from soliciting any kinds of services from any company other than the one associated with the contract.
Violating the exclusivity agreement can bring large penalties, fines, and the selling party can even take legal action. To surmise, exclusivity agreements are complex documents with many facets and implications, but as damaging as they can be in some extreme scenarios, most of the times they can protect all the parties involved. If you want to get a rough idea of how an exclusivity agreement looks and functions, you can read this article on Templates Assistant, a website dedicated to all matters concerning legal and business documents.
Now that we have covered the basics of these agreements let us discuss, concretely, how it can affect your business.
Disadvantages of Exclusivity Agreements
Exclusivity agreements can, in some cases, put a hamper on the signing company’s growth opportunities, as well as financial strain. If a new business opportunity arises while the agreement is still valid, the signers can’t take advantage of it – unless the signers negotiated more flexible contract terms.
Let us take a brief example to put the whole issue into perspective. If you have been on the Internet for long enough, you have probably seen bloggers, vloggers or other independent media personalities promoting various goods and services along with producing their original content. In most cases, these promotional materials are the result of an exclusivity agreement closed between a company and the internet personality.
This agreement might prevent them from writing or talking about similar products in order to not create confusion amongst their audience and protect their brand integrity. So, the disadvantages of an exclusivity agreement are already obvious, and you can extrapolate and apply them to any kind of business, whether it is in the realms of new media or otherwise:
- Missing out on (possibly) more advantageous business opportunities in order to avoid fines, penalties and legal action from the other party
- Limited creative and business flexibility
But again, these are extreme cases. Today, due to the competitive nature of the market, exclusivity agreements are not so cut and dry as before.
How an Exclusivity Agreement can Protect Your Business
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Closing an exclusivity agreement can bring many benefits and advantagesif the contract itself is negotiated in such a way that it serves in the interest of all parties involved. If you are planning to sign an exclusivity agreement, a good idea is to ask for increased compensation for any future missed business opportunity. Here are a few advantages of exclusivity agreements:
- Exclusivity agreements will spare both parties of big logistical conundrums. Because one party does not have to worry of losing the services of the other thanks to the legal agreement, the brand can focus on ways to win over the competition.
- Exclusive distributors are financially and logistically capable of handling, stocking, and transporting huge amounts of inventory. With an exclusivity agreement, brands – especially startups who are looking to cut costs in order to focus on the future of the business itself and their products – will not have to worry about these aspects.
- Networking and building deep, long-standing business relationships. As any businessman will tell you, whether we like it or not, networking is one of the key components that will ensure the future of the business. On the flipside, it is also one of the most dreadful and time-consuming tasks that business owners and executives have to accomplish. Exclusive agreements (relationships, in this case) will minimize the amount of contacts you need to establish and manage in the business world, making way for a stronger, more deep-seated bond that can prove advantageous for all parties.
- Obviously, if you are temporarily giving up on new potential business opportunities for an exclusivity agreement, you will be generously compensated for this fact.
- Financial security. With all of its disadvantages, an exclusivity agreement will ensure a guaranteed revenue stream that can be used after the contract expires.
- Because distribution is already handled through the exclusivity agreement, the brand can focus on marketing and other ways of promoting their products and increasing sales.
- One of the biggest issues faced by many upcoming companies that are trying to penetrate a foreign market is the specificities of said country. An exclusivity agreement closed between a brand,and a local company will give the brand access to local manpower and experts who know the ins and outs of the local market.
Exclusivity agreements, although generally advantageous if the terms of the contract serve the interests of both parties, are not perfect. By signing an exclusivity agreement, one party can lose on many, probably better, business opportunities for the entire duration of the contract. But while this might be reason enough to convince business owners to not initiate such a deal, exclusivity agreements have many advantages that compensate for this – premiums, localization, financial security,and control.