11 Ways to Nail Sales Contracts
SIGN UP FOR FREE EMAIL CONTRACT TIPS HERE!Recently, I traveled to this almost abandoned, stunning market town in Tai-Shan, an area in southern China. A former agricultural center, each trader built a different building matching his home country’s particular style of architecture. After awhile, the cacophony of different buildings must have seemed overwhelming! By the way, the first thought that hit me was that this has some serious cinematic production value; a resident quickly explained that filmmakers shot China’s all time biggest box office smash here, Let the Bullets Fly, a great film for Chow Yun Fat fans! When you handle sales, the contract is often the bane of your existence. It can be tremendously difficult to herd together the lawyers, contract managers, finance staff and others who all want changes that hold up closing the deal and earning your commission, let alone the myriad issues to negotiate. All these people and negotiating points end up being as unique and different and overwhelming as this town’s many different buildings. Usually, sales professionals are too flummoxed by the idea of mastering the key contract issues to move the deal forward to conclusion, and allow all these people (especially lawyers) free rein while grumbling behind closed doors about how long the entire process lasts. But there is a great solution to this morass: illuminate the most heavily negotiated points that occur over and over again, and pick a negotiating strategy that will maximize your chances of closing a successful deal in a timely manner. And, as a lawyer, you can do the same. In this post, you’ll see a detailed plan for constructing your plan of action for the top issues in your sales agreement format.
What Are You Selling? Believe it or not, people often gloss over this simple question. I’ve seen many contracts over the years that stated the vendor sells the customer a “Server” or a “Solution” – but a server can be hardware or software, and a solution could be anything. Routinely, people insert “To Be Decided” under the goods/services description, or use a cursory one sentence explanation that leaves tremendous room for later arguments as to what the customer actually wanted. Smart salespeople don’t create problems down the line that jeopardize ongoing revenue. They insert a comprehensive, clear description of exactly what will be provided to the customer. This allows you to set the customer’s expectations properly at the start of the negotiations so they don’t end up disappointed later. Additionally, sometimes purchasing agents like to change the “rules of the game” or “move the goalposts” constantly so you never nail down the scope of the deal. This approach stops that from happening nicely.
Vanquish the Vague. Litigators feast on vague contract provisions like “Server” or “Solution” because they leave a great deal of room to argue that the vendor failed to provide what was promised. You don’t want to end up in a dispute with a customer where they can make this kind of argument. When drafting your goods/services description, think of it like this: if a total stranger picks up this document 10 years from now, will they read your description and reach the same understanding I have of it? This method makes you think long and hard about how straightforward your language is and whether you’ve removed as much room for doubt as possible as to what the picture of the delivered and completed good/service looks like. Now that you know to include a great, crystal clear description of what you sell, here are 11 top issues for your sales agreement format:
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1. Slice and Dice – What’s the Price? Consider all the possible scenarios for the payment structure:
- Set Amount.
- Charge by the Task.
- Charge Per Good.
- Charge Per Milestone Success Targets.
- Weekly/Daily/Billable Hours Incurred.
- Price Protection (ensure that the price won’t exceed a set amount, but you’ll charge less if the billable hours incurred total is smaller).
2. Timing: Give Me Some Money! Consider all the possible timing methods for receiving compensation from a customer. Some of these might work better than others in satisfying customer needs to close the deal:
- Divide by Key Dates: You might charge 25% to 33% on each key date that comes up over the course of the deal. For example, you might charge 25% upon signing the sales agreement, 25% upon shipment (or when the customer receives your goods), 25% once the customer tests and accepts the goods, and a final 25% once the customer installs the goods in the production environment.
- Pay By the Month: Usually you might charge for the tasks you perform by tracking the time and billing on a set, time-based rate.
- Acceptance/Receipt: Tough customers might push to hold back payment for a long time after receiving an invoice (some companies insist on 45 days!). You might want a stricter period, and insist that if the goods meet the specifications per an acceptance test, at that point you must receive full payment.
- Success Targets: If you successfully roll out a new product or service through a series of phases, such as creating the specification, building a prototype, successful testing, main production and installation, and final acceptance test passage, you might ask to be paid each time you successfully complete a phase. This approach works well for larger corporate customers facing tight budgetary restrictions and scrutiny who need more predictable cost projections.
3. Drop the Price. Sometimes salespeople increase immediate vendor cash flow by letting customers obtain a nice discount. That discount might be one percent off a very large fee if the customer pays the entire project fee up front or shortly after signing the sales agreement.
4. Out-of-Pocket. If your company must pay certain amounts up front to service the client (usually this involves paying subcontractors that you need to complete the project), and you did not build these costs into the fee, then you definitely want to make sure the sales contract requires the customer to reimburse you.
5. Scheduling. Drive your projects forward to conclusion and receive all payments owed by using tight deadlines in a sales contract. A good time line spells out exactly what will be done, which helps ensure that you have a happy customer because their expectations are properly set up front. Additionally, you end up with tremendous internal discipline for your operational team because they have clear targets that they need to meet to ensure successful completion of the deal.
6. Conditions Precedent. Think about anything you need the customer to do so that you can make a profit on your fee and hit the sales agreement internal deadlines. If the customer doesn’t timely sign off on a specification, provide proper loading dock space, ensure sufficient cabling, put in place proper power generation, or fails to perform any other condition you need met so that you can live up to your sales contract duties, then your deal can quickly become a money-losing, long-term quagmire. However, if you spell out these exact assumptions and state that the customer must meet them as a “condition precedent” to the pricing and timing requirements, then you protect yourself. It might even be wise to include a day-for-day slip in your deadlines for each day that the customer delays, and to include the right to charge for extra hours incurred.
7. Who Is Responsible? At some point when you distribute goods to a customer, you release your responsibility for those goods and the customer must handle them. If anything goes wrong with the goods after that point, that’s the customer’s concern and they must sort out the relevant loss and insurance issues. What you don’t want is the customer to think you are still “on the hook” for these goods when you know you are not. So it’s best to specify the point at which loss risk passes, which usually happens after: (1) The goods pass an acceptance test at the customer’s premises, or (2) The customer just receives the goods on-site, or (3) When you place the goods in the hands of the shipping carrier.
8. Warranty Length. Figure out how long you ensure that the goods and services comply with the excellent description you drafted as part of the sales contract. You might provide a warranty that guarantees this compliance for a year or so, or a lesser amount of time, such as 180 days. Either way, spell out the exact nature and length of the warranty so the customer knows what to expect.
9. Cap It Up. It’s essential to figure out whether or not you face a large risk of paying huge damages to an unsatisfied customer who sues you. To prevent the damages from getting out of control, you can include a liability disclaimer that knocks out the biggest damages and sets a flat cap on the total amount you can possibly owe.
10. Hold Me Harmless. Sometimes customers want a hold harmless clause appearing in a sales contract that protects them if someone sues the customer because they bought the goods. For example, one of your unsavory competitors might sue your customers by arguing, right or wrong, that you stole the competitor’s technology to manufacture the goods. Most smart vendors try to convince customers this kind of clause isn’t necessary because they don’t want to handle this kind of litigation, but, if the customer insists on it to close the deal, you might accede. However, sometimes sellers actually want a hold harmless clause included in the sales agreement. The classic example is where the customer designs a new product and provides that specification to the seller to then manufacture the product. If the customer stole the design from someone else, the seller certainly doesn’t want to pay for damages due to this scofflaw and prefers the customer to hold it harmless.
11. Kill the Deal! A customer might ask you for a clause that says they can kill the deal and not continue to pay additional amounts due over the sales contract term. This might completely screw up your profitability expectations, especially if you provide low cost monthly payments to finance, over the life of the sales agreement, the customer’s use of an expensive product. You protect yourself from this kind of termination clause by insisting on a “Kill Fee” that the customer must pay you. This fee usually is quite large at the beginning of the sales agreement term but becomes minuscule towards the end when you’ve booked most of your promised revenues.
Master termination issues with our previous post here.
These are the key issues you care about for constructing your sales agreement format.
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