Landing a big client is generally cause for celebration as a small business owner. If you’re signing a contract to supply a client with your products or services, you might be asked to commit to an exclusivity clause.
An exclusivity clause means you are being asked to restrict your supply of products to just that client, industry or geographical area, depending on the details of the contract.
Before you agree to an exclusivity clause, it’s important to consider what is involved and what the impact on your business could be.
The benefits of exclusivity
As a small business owner, there are clear benefits to supplying a large client with regular orders. The larger the orders, the more value the contract will have within your business. This could help you with more predictable cash flow and security - but always make sure it’s a contract you can fulfill in terms of your own suppliers, staff and business operations.
Supplying a big client also means that your products or services could receive more exposure than you might be able to achieve on your own. For example, imagine your business is selling handcrafted furniture and a large retailer wants to sell your furniture exclusively. As part of your contract, your creations might be featured in their product catalogues, website and social media campaigns. This could put your products in front of a much wider audience than usual.
The risks of exclusivity
Before you agree to an exclusivity clause, you’ll need to weigh up the risks to your business. Committing to supply a client on an exclusive basis could mean missing other opportunities in that industry or area. Depending on the details of your contract, you may be asked to supply to that client exclusively for a few months or even a few years - so you need to look ahead at how this could impact your bottom line.
You could also have less control of how your products and services are promoted, as this would be handled by the client’s marketing team instead of your own.
Building strong client relationships is essential in business, but an exclusivity clause could also mean that your client later expects discounts or priority treatment as part of that relationship.
Make sure you understand the terms
Before you agree to an exclusivity clause, it’s important to negotiate terms that you are comfortable with. For example, you would need to:
- Make sure the contract is a size and value that you and your team can sustain for the length of the contract. You don’t want to find you have committed to something you can’t deliver, or that isn’t worth the opportunities you might miss from being exclusive.
- Be very clear on the processes in place around orders, delivery, warranties and other supply details involved.
- Ask your client to be specific on their commitment to the success of your products or services. Using the soap example, you could ask how your products would be displayed and promoted and whether any competitors also supply that retailer with their products.
It could be worth consulting a legal professional to make sure you understand exactly what’s involved before you agree to anything.
If you’d like to discuss how to manage the supply of your products or services, or any other challenge you’re facing within your business, contact our free business advisory service.