Tips For Negotiating VAR/OEM Agreements
By Megan R. Nichols
Manufacturers and product developers often get to the point where they want to expand the reach of the merchandise. Value-added reseller (VAR) and original equipment manufacturer (OEM) agreements can help them do that.
Whereas a value-added reseller packages a product with others that complement it to make the item more enticing, an original equipment manufacturer takes components from one or more sources to build items sold under its brand name. Some companies — particularly those in the hardware and electronics markets — provide parts to the OEM market and act as OEMs themselves.
Here are some tips for negotiating agreements so the terms are as favorable as possible for value-added resellers or original equipment manufacturers.
Strive For Equality Between The Parties
At the beginning of a collaborative effort, each partner usually has some advantages over the other. The goal is to strike a balance so each involved entity gets gains that would have likely not been possible otherwise.
Some of those improvements include higher sales or improved market share, for example. Some contracts feature wording and terms that stack the advantages in favor of one party rather than keeping things more balanced. When that happens, the partnership tends to turn sour, and the entity that feels the most displeased may take legal action. When one or both parties lack experience in drafting VAR or OEM contracts, inequality is more likely to creep into the picture.
Kevin Weiss is the CEO of Spireon, a company that entered reseller agreements with car dealers across the United States to sell Kahu, its GPS offering that aids in stolen vehicle tracking, increased sales, and other perks. Weiss explained, "When selecting a potential partner, it is important to recognize that both companies must complement each other in a way that not only creates revenue opportunities but also presents other compelling reasons to do business together."
Clarify The Marketing Responsibilities Of The Reseller
The contract should also specify what specific marketing duties the reseller will handle. Ironing out those particulars early is to everyone's advantage because it ensures the reseller helps the product or service reach the market.
The reseller should only agree to marketing-related terms if they feel they have the necessary expertise to get the results expected by the other partner. The supplier usually provides marketing resources to the reseller, which means there must be channels in place to spread the word about the product or service in the respective territories.
Failing to discuss the extent to which the reseller handles marketing could lead to misunderstandings on both sides, especially if one party feels they fulfilled their obligations and the other does not agree. If the contract is clear enough to leave nothing to interpretation from the marketing side of things, everyone is on the same page.
Include Sanctions For Evidence Of Counterfeit Goods
OEMs must take great care to avoid contaminating their supply chains with counterfeit parts. If they cannot succeed in that aim, the associated problems span from consumer injuries to reputational damage. OEM and VAR agreements should delve into what happens if non-authentic parts make it into supply chains. Consumer and industrial businesses lose around $250 billion annually due to counterfeit electronics parts alone, so it's a major issue.
Even if a product with a counterfeit part does not harm someone, it could still frustrate the consumer and lead to returns. When return rates are too high, the parties that negotiate agreements that seem to work end up losing out.
Moreover, if a reseller knowingly offers items with counterfeit parts, they face substantial fines and prison time. A contract should ideally contain portions that mention how fake goods associated with the reseller or supplier constitute grounds for termination of the contract. Those protect everyone involved by emphasizing how crucial it is to carefully monitor supply chains and only work with trusted suppliers.
Avoid Agreements Spanning Multiple Years
A long-term deal lasting for several years may seem attractive at first. VARs and OEMs may believe that inking a contract that stays in effect for a long time makes them more able to plan because the contract terms set some parameters. However, prolonged deals limit flexibility and reduce opportunities for future growth.
The people involved in contract negotiations should also beware of evergreen termination provisions. Those require that the party wishing to end the agreement provides written notice within a certain time frame. Failing to do that means the contract gets renewed automatically. The better approach is for the parties to mutually decide to continue the deals for one additional year at a time.
The crucial thing to keep in mind is that a lot can happen in a year. In the best scenario, everything will be going splendidly at the end of it, making the involved parties eager to continue. However, the safest bet is to take things a year at a time and work out the terms so people can reevaluate the situation later and go from there.
Aim For Exclusivity When Warranted
Some VARs and OEMs try to negotiate agreements to have exclusive rights to resell a product in as many territories as possible. That's understandable, but issues can arise if a reseller does not have the necessary traction to support the marketplace exclusivity given to them.
Addressing exclusivity in a contract lets a VAR or OEM move forward without the obstacles competitors provide. However, the reseller must ensure they can meet the supplier's minimums connected to those exclusive rights. Some contracts also contain incentive strategies to entice resellers. They encourage meeting milestones and getting money back once they place specific order quantities.
Exclusivity associated with geographic areas is one of the most common types, but you'll also see other varieties, such as a market or a distribution channel. It makes sense for a reseller to get some exclusivity rights, but only if they have the resources to make the arrangement viable. If the contract contains sales projections and performance incentives, the reseller knows what targets it must hit to fulfill the terms.
Negotiate Agreements With Care
If an OEM or VAR is entering into a contract to resell products for the first time or does not have substantial experience doing it, the entities could be overly hasty when drafting the agreement. When that happens, it becomes more likely that one or both parties end up realizing the deal is not as favorable as it first seemed. These tips can help resellers steer clear of pitfalls.
It's also wise if the parties hire legal professionals to look over everything before signing documents. Going over the terms slowly and methodically leads to satisfaction and a fruitful partnership.
About The Author
Megan R. Nichols is an industrial writer for sites like Thomas and IoT Evolution World. Megan also publishes easy to understand manufacturing articles on her blog, Schooled By Science. Keep up with Megan by subscribing to her blog.