Exclusivity agreements, also known as ‘’lock out’’, ‘’shut out’’ or no shop agreements, are complex legal documents signed by two or more parties through which the buyers are obligated to purchase goods or services from a single predetermined provider. This type of contract also prohibits the buying party to solicit or seek the services of another party throughout the duration of the agreement.
But as prohibitive as this type of arrangement might seem, if it is negotiated in terms that are favorable and fair to all parties involved, the business entities (in our case, companies, whether major or startups) can truly benefit from a financial and practical or logistical standpoint. Here is why your business may need an exclusivity agreement.
What is An Exclusivity Agreement?
As we have previously explained, an exclusivity agreement is a contractual obligation between two or more parties to seek the services and products solely from the provider that has signed the document. It is a complex kind of document with lots of legal specificities that are best reserved to a lawyer, but all you need to know is that violating an exclusivity agreement can lead to some dire consequences. Apart from the natural fines and penalties, the provided might seek damages in court, which could prove extremely damaging to your long-term chances of success in the business world.
Now, with these facts in hand, you might think that an exclusivity agreement is nothing but bad news for your business. But actually, most of the times, the benefits outweigh the disadvantages. If you want to find out more technical and legal details about these exclusivity agreements, as well as a few design templates, make sure to check out this article on Template Assistant, a specialized website dedicated to all matters related to this subject.
A common element that most exclusivity agreements share is confidentiality. When two economic entities establish a business relationship, one of the parties might have access to highly sensitive and, not to mention confidential data that could prove valuable to competitors. That is why exclusivity contracts include the obligation that both parties commit to full cooperation in order to ensure full business synergy and to prevent any future mismanagement caused by communication issues.
When Should You Sign an Exclusivity Agreement?
Exclusivity agreements are signed when a company, usually a startup with an exciting new technology or product or simply business potential, could have an advantage over the competition if they had the means and resources to distribute them and ensure sufficient market coverage. From the perspective of the other party, they would want a fair business partner that offers them premium prices along with other advantages throughout the duration of the contract.
The main disadvantage of an exclusivity contract (which we will cover later) is the fact that by doing business only with the parties mentioned in the contract, you could lose a fair share of better opportunities. But, as we have mentioned before, the advantages outweigh the drawbacks. This is what you can expect from an exclusivity contract:
- Every self-respecting businessman is aware of the importance of networking and building deep, long term business relationships. Every businessman or executive will tell you that networking is one of the most time-consuming tasks, and an exclusivity agreement will minimize the amount of contacts you need to establish in order to seek and take advantage of potential business opportunities.
- Financial security. Due to the nature of the contract (which is based on trust and collaboration), an exclusivity agreement will ensure a constant revenue stream that can be utilized after the end of the contract.
- One of the biggest problems that emerging businesses face is exposure and distribution, and an exclusivity agreement can offer your business just that. Provided, of course, all parties respect their end of the bargain.
- Because all logistical issues are handled from the get-go, the brand can focus on other things, like marketing and brand management.
Risks of Exclusivity Agreements
Finally, it is not possible to discuss about exclusivity agreements without addressing the risks involved. As we have previously stated, an exclusivity agreement has the potential to, at times, put a hamper on company’s growth opportunities. Unless the parties negotiated flexible terms before signing the contract, the signers can’t take advantage of more beneficial offers from other companies.
To give a brief example, you have probably seen bloggers (or vloggers, more likely) and various other internet personalities promoting certain products along with their original content. This is a component of a newer business model, through which companies choose to promote their products by using the exposure of the influencers in order to reach younger audiences. Those promotional materials might be the result of an exclusivity agreement that will obviously prohibit said internet personality from talking or promoting other similar products.
In the current economic atmosphere, emerging businesses have to find new ways to stay relevant and in business. If you want to open a business and grow it, one good way of doing this is by initiating an exclusivity agreement with other parties. Sure, there are disadvantages – which mainly consist of losing potential business opportunities -, but this type of contract will spare you of many logistical issues and allow you to focus on the brand itself.