What are Sales or Return Agreements and when do they become useful for an entrepreneur?
In the present economy with limited credit SOR Agreements are a increasingly popular way for new suppliers, distributors and manufacturers to build a distribution network with established retail outlets. Sales or return (also called a consignment agreement) is a commercial arrangement by which a retailer pays only for goods sold, returning this that are unsold to the supplier. The supplier is the seller and retains ownership of the goods till they are paid for in full and after a certain period takes back unsold goods.
While a SOR agreement might seem like a great way to move mechanise it is important to be aware of the risks and mitigate them accordingly. technically the supplier is providing credit for the buyer, at 30, 60, 90 days or more. The number of days that you are willing to provide credit depends on a number of things – the capacity of the retail outlet, their reputation, the customer traffic and the terms and conditions (T&Cs) you agree with them. Always try to have a written agreement. A lot of trading in Nigeria is on the informal market where written agreements are rare, it is important nevertheless to have a written document or if you are using a verbal agreement clear terms and witnesses.
Terms and conditions should include clauses that cover what happens in the event of loss from theft, fire or bankruptcy. Legally the retailer does not own the goods and they remain the responsibility of the supplier. Because the retailer does not own the goods and can return all unsold stock there is no great incentive to market your product. Try and negotiate display terms and if you will do any in store marketing (e.g. display cards, posters, stand etc) discuss with the retailer before hand and be sure they agree for you to bring in and display your marketing materials.
Also every important to get the retailer to agree to pay for any damaged goods. This is frequently neglected and goods are returned damaged or shabby and the supplier is unable to sell them elsewhere as new. One way to mitigate this risk is to deliver a limited quantity of goods for a shorter period of time and to visit the retail outlet frequently to assess the status. You can read more about how to mitigate the risks of SOR agreements here.