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Sales Agreement: Close the Deal! Read our great article below on how to negotiate a Sales Agreement.
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Complete Description. This Sales Agreement covers vendors selling goods, and explains deliverables, deadlines, ownership, title, risk of loss, fees, invoices and taxes, warranties, disclaimers, limitation of liability, indemnification, term and termination, force majeure, and general boilerplate for a sales agreement.
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SALES AGREEMENT EXPLAINED
Most sales directors don’t take responsibility for their own sales contract. I’ve even spoken with heads of sales and quizzed them as to how well they understand the key contracting issues that arise over and over again during most sales agreement template negotiations. Usually, they know few issues, and almost none of the different negotiating permutations. This means that they can’t form an effective negotiating strategy to close the deal over and above the price. The purpose of this article is to provide sales professionals and their attorneys with a blueprint for tackling a typical sale agreement template.
What Are You Selling? This is the central issue for all sales contract template discussions, and needs to be answered up front. If you sell a consulting service, then you include a comprehensive description of every aspect of that service in a clear and straightforward manner. If you sell a good (or “deliverable”), then describe that good in detail so that the customer completely understands exactly what you provide. Remember the whole purpose of working on a written contract: you want to establish a basis of trust with your customer so she knows exactly what she buys and you know exactly what she pays. Upon delivery, many salespeople find customers from time to time extremely upset because the goods or services did not live up to expectations. Smart salespeople avoid this risk in the first place by inserting a strong description at the time of contracting. This does two things. First, it informs the customer at the start as to exactly what the good consists of so that the customer won’t be shocked later. Second, it forces unreasonable customers who constantly change their expectations to refer to the contractual description as the “bible” of the deal going forward so any unreasonable demands can be checked as the deal moves along. Failing to include a strong description increases the risk that sales managers and their customers might soon have expectation headaches.
Beware “Tuition Payers.” Too often, sale agreement descriptions include a cursory phrase, a short sentence, or, worst of all, the dreaded words “To Be Decided.” Some litigators call these kinds of descriptions “tuition payers.” Why? Well, talented trial attorneys look for any opening in the contract language that allows them to make an argument that the salesperson didn’t execute properly and live up to the agreed upon deal’s expectations. The looser the description is, the more room there is to make this kind of argument, even if the seller vociferously feels otherwise. And the more room there is to argue that the seller didn’t live up to the deal, the more likely the customer’s trial attorney will win, earn a lot of money, and be able to pay his daughter’s college tuition. The bottom line is that a salesperson can’t convincingly argue at a later date that the lawyer is wrong and the sales contract was fulfilled if no one clearly understands what the sales contract template description fully required because it is incomplete.
Fee Types. There are many ways to strike a deal on compensation. You can charge:
- Flat Fee.
- Fee Per Service.
- Fee Per Deliverable.
- Fee Per Milestone.
- Hourly Rate.
- Daily Rate.
- Guaranteed Maximum Fee (this is the lesser of a flat fee or the total of the rate fees in hours or days).
Payment Schedules. Customers follow a wide range of payment schedules:
- 1/3 Percentage:
- 1/3 payment on Effective Date, 1/3 on Deliverables receipt date, and 1/3 on Deliverables acceptance date.
- 1/3 payment on Effective Date, 1/3 on Deliverables shipment date, and 1/3 on Deliverables receipt date.
- 1/4 Percentage:
- 1/4 payment on Effective Date, 1/4 on Deliverables specifications date, 1/4 on Deliverables receipt date, and 1/4 on Deliverables acceptance date.
- 1/4 payment on Effective Date, 1/4 on Deliverables specifications date, 1/4 on Deliverables shipment date, and 1/4 on Deliverables receipt date.
- Monthly: Monthly payments for Services based on hourly rate.
- Acceptance/Receipt: Payment of overall flat fee upon Deliverable acceptance or receipt.
- Milestones: Payment upon milestone achievement.
Discounts. You might want to increase your cash flow by offering customers an overall discount on the sales agreement if they pay the entire amount up front. Typically, vendors offer a 2% discount if the customer pays the entire fee within 10-15 days of signing the sale agreement form.
Expenses. The sales contract should always clearly state the exact types of expenses incurred by the seller that the customer must reimburse.
Deadlines. Many vendors skip including a schedule for delivery and completion of the goods and services. They usually omit the schedule because they want to preserve maximum flexibility for their own needs. This can create a twofold problem. First off, your customers might expect the schedule to be completed by a date that you didn’t know about, so you end up with an unhappy customer because you never reached agreement on this key issue. Second, a deadline gives your employees discipline and a goal that they have to meet which can increase productivity and keep your business running smoothly. Not including a deadline means you miss out on this improved level of focus.
Assumptions. Remember, much of what you promise as a vendor depends on whether the customer performs certain actions as well. You can promise a fast delivery date, but if the customer won’t be there to receive the goods, or won’t properly set up its premises to install the goods correctly, you can’t meet your delivery date obligation. You can promise a terrific fee, but if the customer won’t sign off on a final version of the project schedule or goods description, and constantly requires additional changes, then your competitive fee swings to being highly unprofitable. As a result, always include in the sale agreement form a list of assumptions that the customer must complete in order for you to have to meet your duties regarding deadlines and fees. The sales agreement template should also state that the delivery schedule increases on a day for day basis for each day the customer fails to fulfill its assumptions, and that the fees increase (typically under your hourly rate) for each extra hour incurred for the same reason.
Regardless of your choice of fees, payment schedules, and discounts, you should definitely make these clear within the contract itself, and not in separate emails, spreadsheets or presentations. Most contracts include a clause called the “entire agreement” or “merger” clause stating that anything outside of the contract is unenforceable, so if you want your pricing to stick, be sure to put it in the right place: the sales agreement.
Ownership, Title and Risk of Loss. Once a customer takes ownership and title to goods, if the goods are damaged or lost, then that becomes the customer’s responsibility. Because of these consequences, the parties usually discuss and agree on the point where ownership, title and risk of loss are transferred to the customer. “Acceptance” is the point after the customer receives the Deliverables and has concluded that the Deliverables comply with the Agreement’s requirements. So there won’t be arguments later as to which party is on the hook when shipments go wrong, you want to specify in the sales agreement template the point at which ownership, title and risk of loss pass from the seller to the buyer. This point is usually one of the following:
- Acceptance by Party-2.
- Receipt by Party-2.
- Shipment to Party-2.
Warranty Length. Be sure to decide how long the goods perform according to the sales contract description. Usually, the warranty lasts for one of these three time periods:
- 30 day warranty.
- 90 day warranty.
- 1 year warranty.
Limitation of Liability. Vendors usually want to include a limitation of liability clause; customers do not. Why? Because vendors have to follow most of the obligations under a sales agreement, vendors face more reasons to be sued than customers. As a vendor, you want to think long and hard about limiting your liability by excluding very large damages (called “consequential damages”) and imposing a total hard cap on your liability. Check out our previous posts on limitation of liability here, here and here.
Indemnification. On the flip side, customers usually want an indemnification clause; sellers don’t. Why? Unlike limitation of liability, which focuses on a possible dispute where one party (e.g., the customer) to the deal sues the other party (e.g., the seller), indemnification concerns a third party not involved with the sales agreement suing the customer or seller. Typically, that third party lawsuit is the seller’s fault, mainly because the seller, in creating the goods or services, wrongfully misappropriated that third party’s own proprietary technology, patents or copyrights. Alternatively, the seller’s employees might negligently cause some damage that injures a third party. In either case, if that third party then turns around and sues the customer, the customer quite rightly feels that the vendor should pay for the lawyers to defend the case and pay for any settlements or damages awarded. An indemnification clause requires sellers to perform this exact kind of obligation. That’s why customers want to include indemnities. Check our out previous posts on indemnification to learn more here, here and here.
Termination for Convenience. Sellers, beware the termination for convenience clause. Customers love to include this clause because it basically allows them to kill the sales contract at any time, for any reason (or even no reason). If your sales contract structure includes scheduled payments over time such that early termination would destroy your expected profits, than this clause can be dangerous for your bottom line. If a customer insists on including this provision, then you should ask for a termination for convenience fee. This fee might vary, as you might set it higher early in the sales agreement term, and lower for any terminations later on, but calibrate it to ensure that the sales contract always remains profitable.
These are the key issues you care about for sales contract template. Have fun using WhichDraft!
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