4 Rules for Crafting Exclusivity Agreements
Also known as a lock-out agreement, an exclusivity agreement is an agreement between two or more parties to purchase goods or services exclusively from the seller within the agreement. An exclusivity arrangement provides exclusive rights to the seller of goods and services and prevents the buyer from obtaining said goods or services from competitors during the duration of the agreement.
During business acquisitions, such agreements are useful because they prevent buyers from negotiating bids from competitors.
Specific restrictions can be placed on either party for the duration of the agreement, such as confidentiality clauses, term-limits, geographic limits, and non-compete clauses. Usually, the restrictions contained within an exclusivity agreement are created to be advantageous to both parties to the agreement. This type of agreement is effective leverage in negotiations and are used in various business transactions including property and commercial transactions.
An important matter to consider, exclusive arrangements are not to be taken lightly. Both parties need to be confident that their potential business arrangement will be advantageous for each of them, before continuing forward with an exclusive agreement with each other.
Crafting exclusivity arrangements isn’t tricky or complicated. Exclusivity agreement templates are available online as a valuable resource. These examples help individuals understand the conventional mechanics and guidelines of an exclusivity agreement.
To get started, here are four rules to consider before crafting an exclusivity contract.
RULE #1: Know when to craft an exclusivity agreement
When a sensitive negotiation is taking place between two parties, they often agree to an exclusive arrangement for the duration of the negotiation, or potential business arrangement. The agreement effectively bans a business or company from courting a relationship with a competitor within the same industry.
Not all business acquisitions require an exclusivity agreement, in fact, experts recommend using exclusivity clauses sparingly, reserving such agreements for business deals of the highest importance. Business insiders believe that exclusivity agreements are best used when a new and/or innovative product or service is newly available on the market.
RULE # 2: Consider the potential risks and rewards from a potential partnership
When potential business partners have decided to use an exclusive arrangement, it’s important to consider all potential risks and rewards. Participants should consider both immediate and long-term needs of each company.
If the agreement is long-term, provisions should be made for an ongoing review, revision, and amendments to the agreement that reflect the (current) business needs of each party.
While exclusive arrangements are designed to benefit both parties, there can be slight drawbacks to them. Buyers with few options benefit more than sellers in exclusive agreements. For the sellers, the agreement could be costly as they are effectively locked-out from negotiating with other alternatives and may not be allowed to take on other opportunities that become available during the exclusive negotiating period.
This effectively limits the amount of revenue for the seller, particularly if the negotiations reach an impasse.
RULE # 3 Know your level of commitment and expect the same
Exclusivity agreements are an important tactic in business deals. Not only does it help foster strong and enduring business partnerships, they help streamline the process of negotiations. Both parties take a serious risk when entering exclusive agreements, so each must be prepared with the best offers before the exclusive period ends.
The provisions set forth in exclusive arrangements are always negotiable. And it is best if both parties enter the arrangement understanding where each stands by way of success. With an exclusive arrangement the partners are both mutually committed to success, and thus each should expect to commit to a certain level of give-and-take to mutually succeed.
This is why exclusive clauses are an effective tool to gain leverage in business negotiations. Experts suggest considering “sticking-points,” or options that are not up for negotiation when crafting an exclusive agreement. There are plenty of other factors to consider when determining those options, some of the most important include:
- Length of Contract – Negotiating how long an exclusive period should last, and whether or not it should extend beyond the initial contract is a stringent point of negotiation. Usually, exclusive agreements range between 6 months to 2 years. Depending on business needs, an exclusive agreement can be any length, so long as it benefits the current business strategy of both parties.
- Specific competitors – It’s important that both parties agree not to work with competitors, that’s the basis of the exclusive arrangement. However, while many exclusive contracts use broad generalizations, potential partners should name specific competitors; preventing any confusion or future missteps that could sour the business relationship.
- Out-clauses – If the exclusivity arrangement is going to be a long-term partnership, provisions should be in place for future reviews; preferably on a routine basis. This provides both parties the opportunity to re-negotiate clauses or opt out of a contract altogether.
These are a handful of factors that should be considered before entering an exclusivity agreement. Both parties should be aware of the each of their interests and desires when negotiating the specifics of an exclusivity agreement.
RULE #4 Understand the benefits of exclusive contracts
With exclusive arrangements, there is a certain amount of leverage that each participate wields. That amount of leverage usually gives one party the advantage of negotiating for a larger and longer contract. For instance, if a seller has a vested interest in a product or brand, and wants to sell that product exclusively, that individual is more willing to negotiate an exclusive deal regardless of price.
A good example of this dynamic is AT&T’s exclusive rights to Apple’s iPhone when it first hit the market in 2007. While the deal was mutually beneficial to both companies, it significantly boosted AT&T’s revenue and market share over its major competitor, Verizon.
Examples like these are not uncommon, startups use exclusivity clauses as a technique to prevent and/or eliminate competition, negotiate contracts in the company’s best interest, and negotiate higher-priced contracts. Media influencers and bloggers with valuable brands, benefit from using exclusive clauses in their contracts.
Some business insiders advise against the use of exclusive arrangements, but for new products, services, and brands, exclusivity arrangements are the most beneficial way to expand business and build solid trusting partnerships that ensure success.