5 things to look for when evaluating a sales contract
As a small business owner, landing a sales contract with a Fortune 500 company can be exhilarating. Yet once the legal-term-laden document arrives, it’s wise to consult a lawyer familiar with such transactions. Here are the five essential clauses and factors you should consider when evaluating a sales contract.
1. Know and vet the supply chain before signing.
Small business owners should research large companies’ supply and distribution chains—manufacturers, wholesalers, local and regional distributors, and brokers, if any—before drafting contracts. Does the company work with reputable suppliers? Is any part of the supply chain in a politically hostile region?
“Once vetted, a business owner should get clear explanations as to volume discounts, return policies, processing time and any restrictive conditions or covenants including intellectual property and advertising concerns,” says Marc Sheridan, an attorney at Markus & Sheridan, LLP in Mount Kisco, N.Y.
2. Make an indemnity agreement.
“As suppliers, small businesses likely have liability insurance among other insurances, but [are] less able to deal with the risk of loss in the supply chain based on their limited capital,” Sheridan says. Therefore, while insurance may cover the loss of an item damaged by others’ negligence in the supply chain, it ultimately increases the supplier’s premiums and cost. To reduce this risk, ask for an indemnity from the larger corporation for losses arising from it, its agents, distributors, etc. due to its or their negligence.
3. Ensure reasonable payment provisions.
Doug Berman, a Dallas-based small business attorney, says small businesses should ask themselves: Will I be paid in a timely manner, or does the payment provision allow too much flexibility in time, allowing large, aging receivables to accrue? “This is particularly important if the funds are needed to finance the smaller company’s obligations under the contract,” Berman says. “For example, the smaller company needs payment for the first shipment to finance the manufacturing of the products for subsequent shipments.”
4. Get a fair termination clause.
Small business owners should make sure they have an equal right to terminate with notice if the relationship is not working out, says Denise Bayer, a small business attorney with the firm Glinatsis Bayer in Canfield, Ohio. Bayer has represented small to middle-market businesses in dealing with Fortune 100 companies. “Smaller businesses should be on the lookout for clauses that allow the larger company to terminate the agreement immediately at any time, for any reason whatsoever, just upon giving notice to the small business owner.”
5. Beware arbitration clauses.
Shane Fischer, an attorney in Winter Park, Fla., says small businesses should look for binding arbitration clauses, contracts that don’t contain attorneys’ fee provisions and venue clauses. “In non-lawyer speak, this means be very wary of dispute-resolution paragraphs that require you to give up your rights to sue and instead force you into arbitration,” he says. “Arbitration clauses are bad for the little guy because the entities that administer arbitrations (American Arbitration Association and the National Arbitration Forum) are much more favorable to big companies than to small companies because the big companies keep them in business. The arbitrators don’t have to follow existing law. Their decisions are binding, and courts are very reluctant to overturn their decisions. As a result, if a small company sues a big company in arbitration, they are going to lose.”