About Consignment Agreements

Consignment agreements are generally entered into by two parties. One is a retail business owner; the other is a person or business wanting to sell a product to the business owner's customers. The agreement typically allows the business owner an opportunity to bring more stock into his store without having to spend money on it upfront. The person with something to sell can get her product seen by potential customers without having to lease retail space to display the product. Consignment agreements are inexpensive ways for both parties to increase their business and bottom line.

Significance

Neither the business owner nor the seller pay each other money until or unless the item on consignment sells. When the customer pays for the consigned item, the business owner takes a percentage of the sale price and then pays the seller the rest. The significance of this arrangement is that risks are low for all involved. The seller is risking only the cost of the item he is trying to sell, and the retailer is risking only the use of a little retail space for the term of the agreement. It's a good way to do business in tough economic times when credit is tight. Before putting together a consignment agreement, don't forget to check with your local and state government to see if there are legal guidelines that must be followed.

Time Frame

The time that an item should remain on consignment should be specified in the terms of the consignment agreement. For example, a consignment clothing store may state in its agreement that it will display used clothing for 90 days. If the items are not sold by that time, they will be donated to a women's shelter. If the seller does not want her items donated, she can pick them up and try to place them in another shop or donate them to the charity of her choice. It is normally unfair for the seller to expect the retailer to display the item indefinitely. Longer display times are typical for items such as antiques that move slowly and shorter for items like clothing. Prior to leaving anything for sale with a retailer, all expectations on both sides should be clarified in writing in the consignment agreement.

Features

Consignment agreements should contain the following basic information: the name of the seller and of the buyer; the date of the agreement, the name of each item consigned and a description of its condition; the asking price of each item consigned; the percentage of the asking price that will go to the retailer and the percentage that will go to the seller if a sale is made; the time each item is allowed to be consigned and the date it should be picked up if it does not sell; a description of what happens to items that are not sold and not picked up by the specified date; how often checks are issued to sellers by the retailer and on what dates; and the signatures of both parties.

The agreements often include a statement that absolves the retailer of any liability related to the product for sale. Some agreements request the seller give the retailer 24 hours or more notice prior to picking up an item. Some also have provisions for renewal of the agreement if the item has not sold by the initial time frame of the agreement. Some may also include provisions for reducing the initial price to a sale price if the item does not sell by a certain date.

Considerations

Other provisions you may want to include in the consignment agreement would clarify what happens if the consigned item is shoplifted, or broken or damaged by the retailer or one of the retailer's employees. Even if the retailer is compiling and issuing monthly reports on consignments, the seller will want to keep careful records, too. Everyone makes mistakes, and it is easier to keep track of many details if both parties are recording everything. Other things to consider are whether the items will be advertised and who pays the cost. If the retailer goes bankrupt and the merchandise is seized, what happens to the seller's items since they are not owned by the retailer? These questions should all be answered in a comprehensive consignment agreement.

Potential

The time and effort spent in putting together a good consignment agreement is well worth it for the result. Consignment arrangements allow business owners and product distributors an opportunity to keep costs low while growing their individual companies. Good agreements that are fair to both parties make good economic sense and can be the beginning of business partnerships that last for decades.