When you negotiate larger partner or distribution agreements, the question of exclusivity often comes up. There are many strategic questions to consider in such a discussion. One of the most important is to ask for something in return, a performance requirement linked to the exclusivity. This prevents an underperforming partner from blocking potential revenue and business opportunities.
The strongest and most concrete requirements are generally linked to actual revenue. They are easy to measure, and they give you a very concrete benefit in the form of money in the bank.
There are also a number of other requirements you can set. It is often a good idea to combine revenue requirements with softer requirements, for example to secure activities that build awareness in the market.
Here are some ways to set requirements in exchange for exclusivity.
• Minimum revenue: Paid on specific dates if revenue does not exceed agreed minimum amounts. This type of requirement is simple and clear, and it gives the company secure revenue, which in turn supports the company’s value. It also gives the partner a strong incentive to build sales.
• The right to end exclusivity: If certain minimum revenue levels are not met by given dates, exclusivity can be terminated. This does not guarantee any revenue and is therefore a looser requirement, but it lets you end exclusivity early, which can be valuable if the partner is not performing at all. The cost of not winning market share can be very high, and this requirement prevents that situation from dragging on.
• One or more advance payments: Or purchases of services, which are then offset against future revenue at agreed percentages. This gives the company early liquidity, and the offset percentages let you control both the profitability of the deal and the size of the total minimum amount.
• Specific market activities: Activities that build a market presence. These are useful when the revenue the partner is expected to generate has a long lead time, which means that any minimum revenue can only be measured far into the future. They ensure that the market is actually being worked before concrete deals can be measured.
• Brand exposure: In marketing material, communication channels, product packaging or, for example, software. This increases awareness among customers and users in the market, which can be worth a lot over time. It works particularly well with a partner or distributor that has a large customer or user base.
• A ban on agreements with competitors: This gives a strategic advantage over the company’s competitors, and it also gives the partner a real incentive to succeed with the products or services in the agreement.
Finally, any kind of exclusivity should generally be used with care, and limited as much as possible while still giving the partner enough value.
Long-term partnerships work best when both parties get what they actually need from the agreement. Before the negotiation starts, find out which kind of exclusivity really matters to the other party, so that you do not give away more than you have to.
Exclusivity can be limited by, for example, product, geography, business area, customer type and contract length.
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