Small Secret Storage Book – Good Faith, available from SecretStorageBooks on Etsy
First up in the Contracts-vaganza (TM pending) – contracts with resellers. Strap in.
You’ve been making your jewelry, art, stuffed animals, widgets for a while, and gaining some traction in your business. One day, a local shop contacts you and wants to sell your products in their shop. Cue celebration music! But before you make any deals, you both need to get a clear contract together.
Why, you may ask? (Or maybe you didn’t, but I’ll tell you anyways.) It’s not because you don’t trust the shop. They are most likely very awesome (they like your work, right?) and fair and won’t screw you over. So why get a contract, instead of relying on their word and reputation? Quite simply, for protection … for both of you. (I had a drawn-out sexual analogy here, but I’ll spare you.)
It is hard to predict issues that may come up – in order fulfillment, item damage, payment, business solvency, etc. – and come up they do. Nearly every owner of a small product business I know has had some sort of issue or dispute come up with a retailer. Some are less dramatic than others, but it just makes sense for all parties to protect themselves in the event something major does go wrong.
Most likely, the shop will have their own contract they will want to use, particularly those shops that operate on a consignment basis.* That’s great, but make sure you read it over and look carefully for the items mentioned below to make sure that the contract is fair for both parties. Always remember that a contract is, at first, an opportunity for discussion. If there is a term you are uncomfortable with, raise the issue, and counter-offer with your own terms. There is nothing to be afraid of, and it is better to speak up now, before there is an issue.
If the shop does not offer a contract, particularly for consignment, you should offer your own for both of you to sign. Be wary of a shop who will not sign a consignment agreement – there is too much at stake for your products for there not to be a clear agreement in place. And shops who work on a wholesale basis may not have a contract, but it is a great idea for you to have your own wholesale agreement for them to sign before you sell.
(And BTW, although I am writing from the prospective of the maker, rather than the shop, it is only because that is my personal experience. Contracts are clearly important for both parties, and most shops you work with will be awesome small business owners, just like you.)
Ok – so you’re convinced to have a contract right? So what should be in the contract then?
WHOLESALE
Let’s start with wholesale, as that is a little more straightforward. At its most basic, wholesale contracts should specify payment instructions, delivery agreements, and returns.
PRICES
Typically, wholesale prices are 50% of your retail price. If your wholesale price is different than that formula, it is wise to clearly explain your pricing before entering into the wholesale partnership. For example, many Etsy sellers set their wholesale price at 50% of their retail price+shipping cost. So if an item is $25.00, and $5.00 for shipping, the wholesale price is $15 (50% of $30). You can also set any order minimums here, which is a great way to weed out less-serious retailers (and those posing as retailers, merely hoping to get a deal from you.)
PAYMENT INSTRUCTIONS
As wholesalers pay up front, this part isn’t too complicated. If you would like to be paid in a particular way, such as Paypal or check, specify as such. And of course, don’t ship anything until you get payment in full.
DELIVERY AGREEMENT
The party responsible for delivery and delivery costs needs to be agreed upon. If the retailer is local, this is pretty easy, with either the maker dropping off the items at the shop, or the retailers picking up items from the maker’s studio. For shops farther afield, parties must agree upon a method of shipping, and who bears the costs of the shipping. The contract should also include who bears the responsibility of damages occurring while in transit. (If it is you, cough up the extra dough and insure your packages!)
RETURNS
This is an area in which wholesale disputes can arise. Because the shop is buying your product outright, it makes sense to have the same return policy as you have for direct sales. For example, if you allow returns for damaged items in your Etsy shop, you should do the same for your wholesalers. It is important, however, to set a time limit on returns, giving the shop a set amount of time to claim a damaged item. By doing that, you prevent awkward situations a month after the sale, when the retailers discovers (honestly, or not) a damaged item. If you have a policy in place limiting the time to claim damage, you can easily cite to your agreement as a reason not to accept the return.
CONSIGNMENT
Consignment contracts can be a little more complicated, as you are entrusting the safety of your products to another person. Some of the core items that need to be agreed upon are the same as wholesale agreements – returns, delivery, and payment terms. Other items are more specific to consignment agreements, such as damages or theft to your items.
PRICES
This typically differs from shop to shop, but remember, you are in charge of your business and can make counter-offers as to what percentage you want to receive of any sales. Locally in San Francisco, it seems like most shops offer a 60/40 split, with 60% going to the maker, and the store taking 40% of the sale price. Depending on your product costs and time, as well as how many items a 50/50 consignment split might work. But because there are no guarantees that your items will sell, and it isn’t costing the shop anything to offer your items, the 60/40 split is more fair, all things being considered.
SALES
What if the shop wants to have a Black Friday sale? Can they put your items on sale? And if so, is the discount taken out of both your payments, or just the shop owners? Make this clear and agreed upon up front.
PAYMENT
This is typically set by the shop, which makes sense. They are dealing with numerous vendors and need to streamline and organize their business, rather than trying to pay each vendor on his or her own terms. Just make sure you understand their payment structure, and that you may not be getting paid for 30 or 60 days, if they are Net-30 or Net -60.
DELIVERY
This is pretty much the same for wholesale and consignment.
RETURNS
Again, pretty much the same for wholesale and consignment. Again, it’s very important to make sure you put a deadline of reporting damages. Something like: “Merchant shall inspect the goods upon arrival. If the goods are damaged or shipped in error, Merchant shall notify Artist via phone or email within 10 days after receipt of goods, and replacements will be issued.”
DAMAGES AND THEFT
This is a big one. Do not sign a consignment agreement that does not provide for compensation if your work is damaged or stolen. As the maker, you should be paid the consignment price or at least the wholesale (50%) price if your items are damaged while in the control of the reselling shop.
CONSIGNMENT TERM
Most consignment resellers will have a specific length of time that they will have your items in their shop. If items are not sold at that end of the period, both parties need to agree on what happens. This could mean another consignment term, of a certain number of months, or returning the items to the maker. If it is the latter, the contract needs to specify who bears the responsibility and cost of getting the items back to the maker.
Oh, and before getting involved with a shop, be sure to get their reseller’s permit information! Especially when dealing with distant shops, this ensures that that you are working with a legitimate shop.
Those are the basics, but I’d love to hear from both makers and shop owners out there – what other issues have come up for you in wholesale or consignment partnerships, that you wish you had agreed upon ahead of time?
*Just a refresher – Wholesale is when the reseller buys your products outright – at the wholesale price you set (typically 50% of the retail price. Consignment is when you provide items to the retailer, but don’t get paid unless and when the items sell.
- Alyson Thomas, Drywell Art
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Unfortunately, this can’t go without saying, but the information contained herein does not constitute legal advice. No attorney-client relationship is formed by reading this post. Consult an attorney for specific legal advice. Thanks!