Consignment Agreements; The Unsung Hero of Small Business

Have you ever driven past your neighborhood shopping center and noticed a shiny new “Consignment store” just popped up seemingly out of nowhere? It kind of makes you stop and think about the word “Consignment” … some of you may be stuck wondering just what the heck it is! Well, Consignment Agreements are a pretty awesome concept, that can be greatly beneficial for both parties involved. Let’s explore Consignment Agreements and how you can use them in your small business!

So, what is a Consignment Agreement?

A Consignment Agreement is simply a business arrangement, usually made between a vendor and a retailer. In a consignment agreement, the retailer agrees to display and sell the vendor’s product, just like their other products, but there is a catch. The retailer does not purchase any inventory from the vendor until the point of sale. This is what makes Consignment a beautiful thing, especially for start up businesses.

Meet Lily, an All-Natural Soap Maker who just signed her first Consignment Agreement with Bob !

Meet Lily, an all-natural soap maker trying to make a name for herself in a very saturated market. All she wants to do is find a way to get her product into the hands of happy customers. While her product is high quality, none of the surrounding retailers want to take the chance and purchase large stocks of a product that may or may not flop. However, she finally gets connected to the owner of her local astrology store. Let’s call him Bob. Bob loves Lily’s product, but he shares the same concern of getting stuck with unmoving inventory. So, Bob purposes an agreement, and offers to take the soaps on Consignment. Now Lily gets to display soaps to all of Bobs customers, and bob gets another great product on his shelves!

How do I track it?

Can I still track sales? How do I account for theft? When do I need to resupply? These are the questions that always comes up when talking about consignment agreements. The simple answer is whatever the contract says. Most consignment agreements that we work with are kept nice and simple, lets continue with our soap maker example. Lily, the soap maker (now called the “Consigner” in contract terms) gives the Bob the retailer (labeled as the Consignee) a set number of soaps. Let’s use 10 for easy numbers. Bob will sign a standard receiving document, confirming he has received all 10 items. Bob and Lily agree to meet back next week to check on her product and see how everything is going.

Next week comes around, and Lily sees that 7 of her original 10 soaps have sold! Bob hands a check paying for the 7 soaps that were sold, The last three remain unpaid for since they haven’t been sold yet. Unfortunately, this is a best-case scenario that doesn’t always happen. Let say that only 5 of Lily’s soaps were actually sold, one of them was damaged, and the 7th was sadly stolen.

Outlined in the Consignment Agreement, “Any damaged or stolen property is not the responsibility of the Consignee”. Meaning that Lily has to take the hit on those two soaps, and will not get paid for them. The opposite of this situation could be possible simply by stating in the agreement, “Consignee is responsible for any damage or theft of items while in care of Consignee.”. This wording puts the least risk on the vendor and holds the retailer responsible for any merchandise while in their care.

A similar situation can be applied to handling returned merchandise.

The agreement could simply state “Consignee is to be reimbursed for any returned items due to manufacturer defect”. While this line seems simple enough, the key words are “due to manufacturer defect”.  In this case, if an item is returned, but not considered defective, the consignee is not due reimbursement. It is important for the vendor to understand the return policy of the retailer before entering into a Consignment Agreement. In most cases, if the retailer has a 30 day return policy, the retailer will not pay for any goods sold, until the 30 day window has passed. This helps protect both parties from tedious tracking of who owes who, and for what return.

Consignment Agreements can be made as simple or as complex as they need to be. However, try to be as direct, and to the point as possible to allow little room for confusion. Below are two downloadable examples of a consignment agreement. Just in these two examples, it is easy to see the opportunity to get into fine detail for specific situations.

Below are some examples of Consignment Agreements along with a simple inventory sheet.

While Anchor Solutions does offer assistance in negotiating and monitoring consignment agreements, Anchor Solutions is NOT a legal representative in any form. Consignment contracts are legal documents and should always be reviewed by a properly licensed legal representative.

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