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Powerful Partners

Locals Only?

Today, Searcy has found a better solution: She's since hooked up with a U.S. manufacturing partner who delivers quality products every time. While inventors can often reduce costs by using overseas production, the risk isn't always worth it. Lower pricing means you have to place larger orders, and poor-quality products in bulk can be difficult to return. Here are some steps inventors can take to minimize problems:

  • Contact your local Small Business Development Center (SBDC) for help. You can find a list of SBDCs on the SBA Web site. Click on the box for "Outside Resources," then click the SBDC box and it will take you to a list of offices throughout the United States. The page can link to an SBDC office you select. You can also check out the government section in the White Pages for the SBA office nearest you-it will be able to give you the phone number for your local SBDC.
  • Make a list. Ask the SBDC for a list of resources or other contacts in your area that can help. You'll want a local contact, as you may require assistance a few times before finalizing a deal.
  • Get the names of at least three U.S. customers from potential manufacturers. Call those references to ensure those companies are satisfied with that supplier.
  • Demand first-article inspection rights from manufacturers. First-article inspection rights let you approve the first production run off the manufacturing line. Only after you give the go-ahead can the manufacturer continue production.

Spell It Out

A private-label agreement will spell out pricing and exclusivity terms. In addition to setting the original price, terms may include the following:

  • Price-increase provisions: The private-label customer may want to protect itself against large price increases, something Searcy included in her agreement.
  • Price-protection provisions: These were also included in Searcy's agreement, and concern the retail customers' price for the private-label product in relation to what people would pay if they bought the product directly from the inventor. A clause might state that the private-label product will always cost a minimum of 25 percent less than the inventor's wholesale price, or that no private-label customer can have a lower price.

Exclusivity is another key issue in private-label agreements. Some potential exclusivity provisions are:

  • Exclusivity by territory, in which the inventor agrees not to private-label his or her product to another company;
  • Exclusivity by market segment, meaning the entrepreneur might grant exclusivity for a particular market. For instance, a manufacturer of a protective glove holder (worn on the belts of police, fire and paramedics) might have an exclusive agreement for the paramedic market with one manufacturer, while reserving the right to strike new private-label agreements for police and fire departments. Searcy's agreement included this provision as well;
  • Exclusivity from other private-label agreements, where exclusivity may apply just to other private-label agreements, allowing the entrepreneur to continue selling the product under its own brand name.
  • Exclusivity from the manufacturer selling under its own brand name, meaning the inventor agrees not to sell the product except through that one private-label agreement. The manufacturer also has to produce subsequent products at the same (or higher) quality level as the first product run.
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This article was originally published in the April 2000 print edition of Entrepreneur with the headline: Powerful Partners.

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