What’s a Reseller Agreement?
Reseller agreements enable manufacturers of product or service to sell through resellers that distribute the product or service to its customers. On the other side of the marketplace, the reseller markets the product or service toward its customers. These transactions take place under unique business models, and dominate a great portion of economic activity in the United States and internationally. In other words, reseller agreements are fundamental to business transactions and the economy.
A reseller agreement usually provides for the requirements on the reseller to market the product or service. The agreement may specify the territory in which the reseller can sell the product or service. Often , a reseller agreement provides that the manufacturer or supplier can terminate the agreement without cause. It is key, however, that the agreement require the reseller to sell a minimum quantity of product. Among other things, such a clause enables the supplier to terminate the reseller that is not performing up to expectations, and also provides the manufacturer with better information about its forecasted demand. Reseller agreements may also provide for mandatory price maintenance whereby the supplier or manufacturer may dictate the price under which the reseller may sell the product or service to its customers. Under the minimum price maintenance clause, a reseller must sell the product or service at the price specified by the agreement, and if it does not, the manufacturer may terminate the agreement.
Core Components of Reseller Agreements
Successfully negotiating a reseller agreement requires an understanding of the critical components of such agreements that will affect the short- and long-term viability and profitability of your business relationship and must be taken into account before signing the agreement. The big question is: What are the essential elements to look for in a reseller agreement? The following discussion highlights some of the key considerations.
Pricing Structure
The parties will need to determine the pricing structure for the resale arrangement. Is there a volume discount? How much is the discount? How often is the pricing structure reviewed and established? Does it accurately account for costs with enough margin to allow for profitability for the reseller? Each pricing structure has advantages and disadvantages. For instance, a fixed price arrangement protects both the reseller and its customers from price changes for a defined period of time, while a variable-price structure reduces the likelihood that the reseller will be in breach by offering flexibility in the event of product shortages or if competitors drop prices. Also consider whether the arrangement provides for a minimum or maximum shipment amount and how shipment amounts will be determined, and whether these amounts will allow the reseller to sufficiently compete in its territory.
Territory
The agreement should clearly delineate a territory in which the reseller will be permitted to conduct business under the agreement. The territory should be clearly defined by specific geographic areas, and may be exclusive or nonexclusive. An exclusive territory will prohibit the agreement’s manufacturer from selling its products directly to consumers or through a channel overlapping with the reseller’s territory, while the manufacturer may be free to sell through other channels in a nonexclusive territory. It is essential to specify the territory in the agreement to minimize disputes between the reseller, manufacturer and competing resellers.
Terms of Sale
The terms of sale will affect the amount of risk borne by the parties, and the parties must carefully negotiate the terms to ensure the terms are acceptable to both parties and that the transaction is not too burdensome for one or the other. For example, the agreement should address whether the reseller must take — or "take or pay" for — all minimum amounts under the agreement and whether the manufacturer must take back unsold inventory. The agreement should also consider how shipments, payment, returns and warranties will be handled and identify when delivery of the products will occur. The agreement should also address the party responsible for shipping costs and customs fees for international shipments.
Advantages of Reseller Agreements
One of the biggest advantages to having a reseller agreement at all is that it allows you to better protect your business from any issues that may come about during its use. While many issues are often covered under the main agreement between two companies, such as a form of master services agreement or an end user license agreement, including a separate reseller agreement serves the purpose of allowing for specific terms and conditions to be set in place for the resale of a product or service. This can help to protect against competition from those selling the product or service and may also help to enhance the customer’s relationship with the reseller.
Another major benefit of a reseller agreement is that it helps both parties understand their specific roles and responsibilities. This is often overlooked when one company is working with another to create the final product or bring about a new service. Based on the end user license agreement, other agreements that the company has in place, and the offerings of both companies, it may not be clear who is responsible for what. For example, if there is an issue with the product for the customer during implementation, it may not be clear whose job it is to fix the issue or even whether it is the job of either party to help with such things at all.
Finally, having a reseller agreement helps to set in place clear expectations between the parties, which helps to foster cooperation between them. When companies don’t completely understand what the other company does, how the work is to be done, or who is supposed to handle certain issues, it can lead to problems because neither company will be able to adjust to each other. By having a clear understanding of the roles, responsibilities, and expectations for each company, they can work together with ease and efficiency.
Typical Issues in Reseller Agreements
In this subsection of the article, we will explore the common challenges to implementing reseller agreements:
Maintaining Effective Communication: Communication challenges are often encountered at multiple levels in reseller agreements. First, the manufacturer must communicate its expectations and requirements to the reseller. Second, the reseller must communicate effectively both with the end user and with those in the chain of resale.
Late Payments: The late payment of commissions can tarnish a relationship. While a one-time delay may not be a big deal, repeated failures to remit payments to the reseller in a timely manner can be a big problem .
Distributor vs. Reseller Conflicts: If there is a failing distributor in place, it is not unusual for a reseller to find itself caught in the middle of a conflict between a manufacturer and either a failing distributor or a competing distributor. Depending on the nature of the conflict, confusion can ensue and sales results can suffer.
Legal Disputes: Legal disputes over reseller agreements are unfortunately not uncommon. A careful review of the entire agreement with an eye toward typical pitfalls can avoid costly mistakes. A well-crafted reseller agreement that properly reflects the intent of the parties can help resolve problems short of litigation.
Effective Practices for Successful Reseller Agreements
One of the best practices for written reseller agreements is to short and simple (or at least simple) but do so in a way that protects your IP, determines scope of license, obligations of the parties, any restrictions, pricing or changes in pricing, the term of the agreement (fixed or evergreen, annual), and termination rights. These are the main commercial points and should be dealt with in an agreement of that type. Agreements of this nature should not be lengthy, nor should there be a bad or boilerplate contract that no one will ever read. The contract should be a basic document by which the parties agree to engage in a transaction. The other element is technology and how that works into an agreement. This can apply to any party in the transaction (whole or part) and often to the reseller and the end user. The time for hire agreements are often lengthier lest the offeree at some point later suggests in court that it was a thinly veiled employment agreement. Given the advancement of technology, it must be part of any reseller agreement. It may be that due to lack of sophistication on the part of the end user, the reseller incurs some expenses that could be recovered through a markup or other charge on the end user. As an acceptable best practice, the agreement should be short, have performance metrics, and should be monitored by the manufacturer to ensure that the reseller is keeping up after the agreement is executed.
Legal Aspects of Reseller Agreements
Some of the essential legal issues that are critical to the development, management and successful execution of any reseller agreement or distributor agreement are discussed below.
Intellectual Property – For companies creating a reseller program, one of the most critical business objectives is to protect intellectual property, both registered and unregistered. When drafting reseller agreements, it is important to remember that the majority of courts will enforce a reasonable restriction that protects trade secrets as long as the restriction is no broader than necessary.
Termination Clauses – An underlying assumption of a reseller program is usually a long-term relationship. However, like any contractual relationship , it is important to have a dispute resolution mechanism in place. A termination provision in these types of agreements provides for an opportunity to resolve the dispute before termination can occur. Governing law and jurisdiction provisions are also essential to tie down where any potential lawsuits will be brought and defining which legal authority applies. Dispute Resolution Mechanisms – Successful distributor and reseller programs are built on relationships. Nothing can destroy that relationship faster than a misalignment over interpretation of the contract terms. Having the ability to resolve disputes efficiently, economically, and fairly is critical to value creation and risk mitigation in these relationships. Risk mitigation tools can include provisions with respect to arbitration and choice of law and forum selection.