Consignment Contract: The Key to Satisfied Consignors

consignment contract consignor contract

She walked in on a Monday morning after a long hard weekend trying to manage family issues that were unmanageable.  Her son, in his early twenties, had been arrested for a DUI and she had to bail him out of jail… again. She was broke and it was coming up on consignor payout day at the store. She was hoping that her china cabinet had sold and that she’d be getting a check to help cover his expenses. Her cabinet had sold, but unfortunately 12 days past her 10 day grace period following her consignment window. She was due no money. Your job just got more difficult because you are the one tasked with explaining to her that not only was she not going to get a check, but that she also no longer has her china. She explodes at the news and blasts out that you never told her anything about a grace period and an inventory transfer. The worst part is that you are not sure that she even signed a contract.

Although this is not a true story, I’ve been in situations just as bad. When these types of things occur you are stuck making a split second decision on whether to pay the commission and lose money on the 4 months of floor space you invested in the stale piece or to stick to the contract and do what is fair based on your policies. Will you extend a hand of grace, or stick to the letter of the law?

The irony is that this decision is one that could have been avoided with clear communication and consistent policy up front. The tool for this type of clarity is the Consignment Contract. Now, I’m not claiming that you can avoid every single instance of a consignor failing to follow the procedures, but I do believe 80-90 percent of these issues can be resolved 90 days before they occur.

“The single biggest problem in communication is the illusion that it has taken place.” – George Bernard Shaw

Consignment Contract

Systems create consistency and consistency solves problems. The Consignment Contract serves as multiple systems in your shop.  It serves as a clarity tool for how your consignment works and a communication tool between yourself (or your employees) and your consignors. If written properly and communicated with clarity this tool will help you avoid the situation above.

Although our shop only requires a contract to be signed the very first time a consignor consigns with us, we do go to great lengths to make sure it makes sense and has been communicated well to those first time sellers in our shop.

Simplicity

We work hard to make sure that each line item in our contract makes sense, not just to our attorney, but to our sellers.  We use simple language and short words. We want our consignors to know what each sentence communicates.

I recently saw a consignor contract that was so confusing, even I, an experienced shop owner, had no idea what the shop policies were. If you have a contract that your consignors can’t understand, then you shouldn’t expect them to follow proper procedures when they consign.

Accountability

We hold our consignors accountable to the contract by asking them to initial every single line item on the contract. This gives us the leverage to go back when a consignor argues that they weren’t aware of a policy to show where they initialed that policy on the contract. Then after each line item is initialed, we have a signature line at the bottom for both the consignor and the employee processing the contract.

Clarity

We work VERY hard to make sure the consignor knows exactly what they are signing. I make sure at the beginning of the contract that they know they can stop me at any time while I am explaining the line items on the contract.  I train my employees very carefully to be specific and detailed when explaining each line item. We don’t read every line word for word, but we recite a clear and simple sentence representing what the line item states. If we do this well, we rarely get disappointed consignors who claim they didn’t understand our policies at the end of the consignment period.  This type of clarity also builds trust among our consignor base.

Elements of a Consignor Contract

You have developed your own policies and I’m sure you have even tweaked them over time. Every contract will look a little different.  We have added and changed line items many times in our 6+ years of business. Our current contract consists of 12 items and they are as follows:

  1. Inventory Ownership: This line items states that any item brought in for resale is not stolen, rented or owned by someone other than the consignor
  2. Consignment Period: This section outlines our 90 day consignment period and is followed by an all caps bold paragraph stating that we do not call a consignors at the end of a consignment period and before an item transfers to the House. We also allow a 10 day grace period to give a full 100 days before an item transfers.
  3. Right to Price and Sell: This line item gives our shop the right to price and sell an item at our discretion.
  4. Our Right to Transfer:  We have two locations, therefore, this line item gives us permission to transport from store to store depending on where we feel an item will best sell.
  5. Early Termination: This gives the right of the consignor to terminate the agreement before the 90 days has passed. However, we do require 20% of the original price to cover our labor and floor space upon early termination. I have only actually charged this out twice, but it communicates clearly to the consignor how important it is to leave their items for the full 90 days.
  6. Commissions: This line item states how much a consignor will receive upon sale of items.
  7. Registration Fee: Line item seven states that we charge a one-time consignor registration fee. We have found that a small fee at registration helps the consignor have a sense of belonging or ownership increasing consignor engagement over time.
  8. Markdowns: Line item six outlines our markdown schedule clearly.
  9. Layaways: We offer short 2 week layaway plan and this line item states that the consignor will be paid on the payout date following when we receive the final payment for the layaway.
  10. Check Day: Here we clearly outline when a consignor will be paid for sold items.  We choose to automatically write all checks owed for items that sell by the 10th of the month on each 15th of the month.
  11. Damage or Loss Waiver: This line item releases us of responsibility of loss or damage.
  12. Unclaimed Funds: We convert unclaimed checks to store credit after a  specified amount of time in order for us to clear our books and still give the consignor a chance to use commissions.

The Key to the Consignment Contract: Consistency

I fully believe that the key to a successful consignment contract is consistency. Nothing weakens a system more than inconsistency. Consignors appreciate it when they know that you work for them just like you work for every other consignor. Stick to your policies.  Show grace where necessary, but be careful to treat everyone equally. Over time your consignors will understand that your shop has policies for a reason and that the reason you are able to work so well for them is because of your tight systems.

Conclusion

If the opening scenario of this article happened in our shop, chances are that we would show grace in this time of need. However, I have also learned a magic phrase over the past few years which I am never afraid to pull out and use when it serves us well. “We’re going to go ahead and give you credit this time, but please understand how important it is for us to follow our procedures. We want to be able to stay in business so we can provide you this opportunity for years to come.”

It rarely happens twice!