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Answers to 5 Common Queries on Exclusivity Agreements

Common Newbie Questions on Exclusivity Agreements

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Many businesses get into exclusivity agreements for mutual benefit. These agreements are created in order to enhance businesses and/or the relationship a particular company shares with another, at the exclusion of others. Usually, a company teams up with either a strong part of its own supply chain or an equally powerful entity in a related niche market, to create a powerful punch in the market.

The best example for an exclusivity agreement in the mobile industry is Apple’s tie-up with AT&T to deliver the iPhone.

What is this exclusivity agreement all about and how does a company go about it? Read on for more....

1. What exactly is an exclusivity agreement?

An exclusivity agreement is a contract between two or more companies to maintain dealings only with each other, only in their particular area of business. Therefore, this is more of a commitment than merely a purely business move.

2. What is the crux of an exclusivity agreement?

The most important feature in this kind of an agreement is that it stipulates that the companies involved do not engage in business activities with other companies for a period of time as stipulated by the agreement. Also, this stipulation is usually binding only on one of the parties. Vertical businesses are the commonest examples of such situations, where the buyer agrees to purchase goods only from one particular seller. A bilateral exclusivity agreement that puts equal restrictions on both parties involved, though possible, is a rather rare occurrence.

3. How does this work with business acquisitions?

These agreements are also useful for important business acquisitions, where there is very tight competition. If, for instance, there are highly competing bids for a particular company, the company that is in the lead with negotiations can make the selling company form an exclusivity agreement with it, thereby preventing it from entertaining bids from other competitors.

4. How else does this agreement help businesses?

While an exclusivity agreement stabilizes a business relationship, this also makes the whole market process more predictable, thereby easing a lot of strain on both parties involved. Since this move helps in shutting out the competition, it lets the company foresee future expenses and plan its business strategies and projects, thereby permitting optimal use of noncapital resources.

5. What additional terms do these agreements include?

Exclusivity agreements could also stipulate terms such as access to data, confidentiality and termination. Entering into a business relationship lets each party know a lot about the functioning of the other, thereby giving it access to sensitive data, which could come in very handy for the competition. An exclusivity agreement could be so drawn as to take into consideration both the immediate and future needs of all the parties involved, as also revised from time to time as per the companies’ needs.

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