An Overview of Reseller Agreements: What You Need to Know

What Is a Reseller Agreement?

Reseller agreements are an important aspect of commercial law that establish the terms under which a reseller can purchase products and then on-sell them to end-users, often with specific limitations on how or where they may market the products. The reselling activity allows the manufacturer or supplier to expand its distribution network by relying on the reseller (typically a third-party company) to promote and sell the products as well as provide customer support. Reseller agreements are often time-limited , allowing for regular review of what is often a fast-moving set of commercial and technical conditions. Depending on the products and the parties, some reseller agreements will include restrictions on the geographic or commercial segments in which the parties can operate, including resale restrictions that prevent the reseller from using web sites or other sales channels that cross those lines.

Terms Considered in a Reseller Agreement

What are the main components typically included in a reseller agreement?
License Grant: The license grant specifies the extent of the reseller’s right to use and distribute the licensed products. The license can be limited to a certain geographical area, or industry or class of end user. The license grant can also be subject to approval by the licensor of the reseller’s customers or professional end users.
Pricing: The pricing provision identifies the price at which the reseller purchases the products from the licensor and establishes a suggested retail price for resale by the reseller to its end users. The pricing provisions may provide different buy/sell prices if the reseller is providing value added services (such as installation and maintenance) in addition to the products.
Terms and Conditions: The terms and conditions typically include the reseller’s obligations to use its best efforts to promote the resold products; obtain any required permits; maintain adequate space, computer equipment and business systems; comply with applicable laws; adhere to the licensor’s branding and reputation standards; prepare reports about its business activities; train its personnel; and be responsible for its personnel’s acts and omissions. The terms and conditions may also include requirements that the reseller protect the licensor’s intellectual property by using reasonable security measures to prevent unauthorized access, copying or use of the licensor’s product(s); and marking/distributing the products with copyright notices, patents numbers and trademark notices, if applicable.
Termination: A reseller agreement typically includes a provision addressing the term of the agreement, as well as the grounds for termination by either party. Termination provisions typically permit the licensor to terminate upon failure to meet agreed upon sales levels or to remedy a breach or non-performance of the reseller within a specified period of time.

Types of Reseller Agreements

There are different types of reseller agreements. The type of agreement that is appropriate for a particular relationship will depend on many factors, including the commodity to be resold, the channels of distribution & the level of trust between the reseller and the company.
Exclusive reseller agreements entitle the reseller to make sales for the company within the company’s territorial boundaries. These agreements usually give the reseller an exclusive right to set re-seller pricing (unless the company chooses to compete directly with the reseller). Exclusive reseller agreements may also contain anti-diversion provisions that prevent the reseller from selling outside the company’s territorial boundaries.
Non-exclusive reseller agreements or preferred re-seller agreements entitle the reseller to make sales within a certain territory. Preferred reseller agreements are common in industries that rely upon independent salespeople to sell specialty items. They post no restrictions upon diversion. They usually do not entitle the sub-dealer to set reseller pricing – instead, the company either sets such pricing or permits the preferred reseller to set the pricing.
Territory-based reseller agreements permit the reseller to make sales within a particular geographic territory. They allow the company to set the pricing for the reseller’s subdealers.

Benefits and Disadvantages of Reseller Agreements

As with any business relationship, there are pros and cons to entering into a reseller agreement for both resellers and manufacturers.
A significant benefit to resellers is that having a manufacturer’s brand attached to their products enables them to increase their customer base and sales volume. Resellers benefit from the availability of the manufacturer’s goods without having to invest in research or manufacture of those goods. The presence of a well-known manufacturer’s brand can lead to increased awareness and credibility.
Manufacturers benefit from increased sales and revenue through the expansion of their products into new markets by way of the resellers. There is an added bonus of free promotion for the manufacturer’s brand through the reseller’s marketing efforts. Reseller agreements may also be entered into on a licensing basis so that the manufacturer allows the reseller to use its brand on similar or complementary products. In such circumstances, licensing and brand dilution issues as discussed above become more significant.
On the other hand, having a big brand attached to the products could magnify losses if the products are not successful. Whether the losses will be catastrophic or not depends on how closely the reseller is linked to the manufacturer. If the reseller is exclusive and takes the time to promote itself using the manufacturer’s brand, the reliance on the manufacturer’s goodwill may be very significant.
Manufacturers wishing to routinely end what is often a decades-long relationship with a reseller may find it difficult to do so because resellers are often financially dependent on the manufacturer for their livelihood. This motivator could lead to resellers giving the manufacturer a bad reputation if the manufacturer pushes them too hard. Therefore, manufacturers should be prepared to offer attractive terms in a termination clause but also put in place an exit strategy before it contracts with the reseller. Such strategies could include regular performance audits, early termination notice requirements and buy-back provisions.
Resellers risk losing the benefits of brand recognition they previously enjoyed when they were wearing the "big hat" of the manufacturer. Resellers also face the risk that the manufacturer will try to wrestle back its customers. To mitigate these risks, resellers can include longer notice provisions or a buy-back provision in their reseller agreement.

Legal Issues in Reseller Agreements

The legal aspects of reseller agreements are pivotal in both establishing a basis for the agreement, such as deciding under what law the agreement will be valid, to protecting the company should it need to sue the reseller for breach of the agreement. The first thing to consider is under what law the agreement will be fulfilled. Such things as dispute resolution and enforceability under the law of the appropriate region depend on this fact. In almost all cases, a jurisdictional clause will give the company the most benefit and allow them to select the area of choice. The dispute resolution should also be heavily considered. As issues do arise between companies and their resellers, having a clear dispute resolution process in place helps make clear the type of resolution required, such as arbitration or other methods. If the parties do not provide for procedures for dispute resolution in the reseller contract, applicable law in the country where business is carried on will apply.
Limitations of the parties may also be an important enforceable clause. Many times companies want to limit how resellers can use their branding and mark-ups, so that they look like one voice rather than multiple . If this clause is so limiting that the reseller cannot reasonably profit from its part of the business, these clauses may be void due to the law that would apply. It is very important to find the balance between appropriate restrictions of a reseller’s operations and providing the reseller with enough freedom to actually make some money.
Lastly, many companies often overlook their right to limit how the reseller may distribute the products. Perhaps the company needs a larger amount of control over their products than they realize depending on the region or area of distribution. Most companies just assume that the reseller understands the importance of not violating patent or copyright laws. If there is any question about this, the company should make absolutely certain to have a clause limiting how the reseller can distribute their product. Depending on the region in question, the company cannot rely on the reseller’s knowledge of a patent or copyright that they might not know about. It is also not a good business practice to assume that everyone knows about patents and copyrights.

Negotiating a Reseller Agreement

When negotiating your reseller agreement, there are a number of areas that are critical to your interests. Make an effort to negotiate these points strongly as you should be able to achieve a favorable outcome.
License Grant
Similar to all licensing agreements, a reseller agreement must define the scope of the license grant. A reseller agreement will always limit your ability to develop competing products (i.e., with the underlying technology of the licensed product) and to license the technology to third parties. Also, you may be precluded from distributing products that are not legitimately obtained from the licensor. These limitations are generally acceptable if reasonable and specific. However, when the scope of the license is too narrow, this may indicate that the licensor is unduly concerned about competition; therefore this could be a warning sign. By careful review of the license grant you can determine if your interests are being protected.
Payment Terms
Every reseller agreement must outline how the reseller will get paid and how it will be able to protect its rights to payment. For example, how often and when should the reseller submit invoices? How long does the licensor have to pay the invoices? Is the reseller securing its right to payment by taking other rights in the form of security? These are just some basic issues that should be considered before entering into a reseller agreement.
Diligence Requirements
What happens when the licensor does not believe the reseller is performing to its expectations? Every reseller agreement should contain a diligence clause that defines minimum sales requirements, distribution of a certain amount of products and/or sales to a provider base. If these requirements are not met, what are the results? Generally, your reseller agreement should contain a termination clause that allows for the termination of the agreement if these requirements are not met. If you want more flexibility, then a good solution is to provide notice to the reseller with a cure period to allow for remediation of the performance issue. Reseller agreements can become one dimensional after execution. Therefore you should include flexibility and the ability to grow.
These are just some of the more common issues that are important to consider when drafting or negotiating a reseller agreement.

Common Mistakes in Reseller Agreements

As with any contractual agreement, resellers and providers should avoid common mistakes in making sure their reseller agreement meets their goals. Below are some of the more common pitfalls that, if corrected, could result in a more balanced, informed agreement. We note these with the caveat that no two reseller agreements are alike, and therefore while the following are important aspects to avoid, they cannot be lumped together as barebones principles to follow for every reseller agreement.
Terms of the Reseller Agreement
One of the most common mistakes is providing insufficient or too much term. Typically, SaaS services are set up on an annual subscription term and renew automatically unless terminated by the reseller or provider by providing at least 60 days notice before the annual expiration date. While we like to give our clients the option on having auto-renewal (for at least one year) terms, it is critical to have a termination right for both parties (with sufficient notice of course) in order to provide parties with a chance to terminate relations based on the prevailing conditions at the time of renewal.
Another common situation is that renewal terms remaining are not enough. The typical term is annually, but sometimes the parties find it difficult to agree to overlapping one-year terms if the reseller has a large customer base and decides that the annual subscription model is not best suited for all their customers. In those situations , it is vital to have the option of modifying the subscription model and setup to monthly subscription terms, or some other form mutually suitable to the parties.
Termination Terms
An important lesson learned from our experience is always to include termination for convenience by the reseller when negotiating a SaaS reseller agreement with a pricing model per new customer. Remember that a reseller depends on its customer to be qualified for the renewal term in order for the reseller to receive its renewal credits. Many SaaS providers only offer to give credits to a reseller for the services that the reseller paid for its customers during the previous term. So it is very crucial for a reseller to tip the scales in its favor by including a termination for convenience provision, allowing it to terminate if its customers do not renew.
Template Versions
The most common template we see used by several of our clients is the MSSP template with slight amendments. While this may seem like a great idea at the time, many of our clients end up spending long hours mapping out the changes made if the reseller has multiple amendments made to the template. Unless both parties have a strict timeline and quality assurance system for amending a reseller agreement template, by the time the amendments are made, the customer has a new version available that they prefer to use. This means that the reseller must then re-review the new version and negotiate again against the clock.