Special Sales Agreements, making money and collecting it!

What’s relevant in a successful contract...

In business, we make agreements every day to sell goods, services and ideas normally for payment in today’s monetised world! Money and payments are as old as the earliest civilisations and not even the mighty Spartan City-State of antiquity could ignore its value. Money in short is a facilitator of progress and how we encompass it into our business contracts will affect our ability to close the transaction with payment and thus make progress in our business achieving sustainability over the longer term.

With large and/or indirect customers, we enter into special arrangements and agreements based on special circumstances of trade, which our standard terms and conditions of trade do not cover. Here are some areas of interest every business should focus on as the ‘seller’ in any contract in my view.

1) Jurisdictional Governance. It is very common for standard terms & conditions to have a governance clause especially in the case of contracts that conduct sales internationally.

2) Product Definition & Price. All products available to the purchaser should be defined in a comprehensive sales contract. This includes product description, list price and details of any discounts/price alterations to the list price. There should also be a clause on price reviews defining a process with timelines on when a price becomes available for review and how consent for any price changes are enacted.

3) Arbitration/Mediation Clauses. They can be a good thing in certain types of contracts depending on the establishment of clear jurisdictional governance and compliance with the local laws of said jurisdiction. Be careful though; make sure any contract clauses of this nature are not in addition to local provisions for arbitration and/or mediation (e.g. mediation is now part of the EU collections process). The value of goods billed under a contract can be tied up for long periods of time in such processes so a customers credit worthiness and your businesses quality control functions are key areas in circumventing dispute issues that could lead into arbitration and/or mediation.

 4) Distributor Agreements. In most industries, sales contracts that fall outside or in addition to the standard terms and conditions of trade are indirect in nature. Distributor agreements can be very profitable for most businesses but can place great strain on the manufacturer's operating cash position and liquidity. The agreement terms would need to cover three main areas in good definition and process content. Firstly, the contract term would need to have qualitative milestones to ensure the manufacturers interests are protected against bad distributor behaviours and/or actions. Secondly, the audit and inspection of goods at the reseller location would need to be part of the contract with access, inspection and retention rights expressed clearly in the contract. Finally, the contract should have retention of title clause with retention of cash sub clause.

5) Retention of Title. The agreement should ideally have retention of title clause with retention of cash sub-clause inserted into the agreement. This would not allow title to pass to the reseller until the reseller has paid for the goods thus making physical goods reclamation possible under law. In the event of collections disputes, a registered retention of cash sub-clause (you need to check its enforceable in the jurisdiction of choice) is a good option as it applies to cash generated from physical and non-physical products.

6) Payment (Credit) Terms. Every company that has a credit facility for its customers should have standard payment terms. “Net 30 days” is the most common in the world today, but with comprehensive sales contracts, payment terms can become a selling point especially if there is a reseller aspect to the relationship being negotiated. The manufacturer should not overlook this as a selling point as margins and discounts often don’t take into account the payment terms excess to standard payment terms if offered in a specific sales contract for goods, services or ideas.

7) Credit Worthiness. It seems obvious but a specific sales contract should have certain terms like payment terms/discounts/etc subject to a credit worthiness evaluation and check. The ability to do business successfully under the terms and condition of the contract should be tied to the ability of the seller to reasonably be assured the buyer can settle his or her bills in a timely manner. I would also insert a clause about agreement to provide security should it be sought by the seller/manufacturer. This often is negotiated and instead of risk mitigation through a deposit/prepayment/etc, risk could be shared with a 3^rd party through a revolving letter of credit, etc.

8) Credit Insurance. If you elect to go down the credit insurance road, do remember that the process structures in credit and collections need to be off a high standard, consistent and transparent in nature. This impacts any exceptions like special terms and conditions around credit in a specific sales contract. You may want to insure the incurred debt given its overall value so any deviation from standard terms and conditions should be checked with the insurer first. If they agree, be sure that any process augments or contractual adjustments required are in place before the contract becomes binding.

Sources/Credits:

Sources:

http://www.aceltisgroup.com/2014/05/28/3-top-reasons-a-real-estate-sales-contract-falls-through/

http://www.dmv.org/articles/making-an-auto-sales-contract/