I have invented a product and am patenting it that I will be selling to retailers throughout the United States. I havn't started setting up any meetings yet to get orders but I have heard very positive feedback about the product so far. My question is how does selling products to major retailers usually work? Do you set up a contract for a certain period of time with them or do they just make purchase orders when they need them?
Some of my concerns are how can I reduce my liability for putting up all the money to make the products and actually getting paid by the retailer. If there is a contract in place I'll have some leverage but if there isn't and theres just a purchase order is that enough to demand payment. I want to make sure that I set the deals up correctly so if they refuse to pay I'll be able to recoup my investment for having the products manufactured for them.
How is this usually handled?
@Sheeba is right that your contract terms will follow an industry standard that varies depending on which area/department your product is in. Hopefully its one where purchase orders aren't typically adjusted or cancelled, and where you're able to get deposits with your orders that at least cover the cost of manufacturing.
Remember that defense of your patent, if one is actually allowed, is going to be a significant annual expense, and that you are required to actively monitor and defend it.
Since you already have an attorney for your IP, ask to work with an associate who can help you compose an appropriate contract for orders. At the same time discuss what is likely to arise in terms of non-payment, cancellations, and such, so you go in to business with your eyes wide open.
For funding purchase orders, banks are often willing to provide what is called "flooring." Flooring is a temporary loan that gives you the money to manufacture based on the strength of the purchase orders you're holding. This means you aren't always tying up your cash, though you pay a little for the flexibility. This is how car dealers operate for example. They are paying interest on the flooring for their inventory of cars on the lot, but they didn't have to have several million dollars in cash to get those cars onto the lot. In the case of cars, those cars are losing value the longer they sit, so there's a lot of pressure to move them before they lose more value than the flooring covered. But in retail, unless you're groceries or fashion, few things expire as quickly.
Contracts are intended to reduce risk for both parties by defining acceptable terms in advance. If you can get pre-payment or at least a deposit, then the buyer is going to want to be sure you deliver on-time, fully, and with promised quality. The guarantees you offer make buyers more willing to pay you. Do you take back unsold inventory? What happens if delivery is late? What happens if products are defective? Is there a price break for pre-payment? You give some, you get some. That's how it's usually handled.
That's a wonderful question. First get yourself a lawyer to deal with all this, or at least you must read up all of this.
Now once getting into any retail or hypermarket deal it's important you have a great margin if it's just on POs.
I would always recommend short 11month agreements so you have a steady demand and supply sense and the cash flows in. Also, be wary of profit splitting.
Now, there's also retail shelf-space positioning and those rates change from product to product. I don't know what's your product, but really if it's something new & attracting customers sometimes the stores itself chase you to be a client exclusive to their store (for products like luxury apparel, jewellery etc) however for FMCG stores it's a different ball game & you may be charged on where you would place your products(close to the entrance, at the back, on the bottom shelf etc)
Again state to state things would differ.
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