Three Agreements That Can Make Or Break Business Value: Part 3 Customer Agreements
In the first and second articles of this series, we discussed how your business lease and employment agreements can have a dramatic effect on the value of your business. In this article, we’ll discuss the arrangements between your business and its customers.
Customers are the sine qua non of business – without customers it’s all an academic exercise. Customers bring revenue and, hopefully, profit.
Business value is tied to both profit and the likelihood of that profit continuing into the future. The more likely the profit will continue and grow, the higher the business value. The less likely that it will continue or grow, the less value the business will have.
In short, profitable relationships with high quality customers is an essential component for a valuable business.
There are two factors to creating profitable relationships with high quality customers:
(1) Marketing and Sales – to bring in new customers; and
(2) Customer Retention – getting existing customers to buy again and to buy more.
At this point you might be thinking: ‘this sounds more like a marketing, sales and service problem, rather than a legal issue.’ And you would be mostly correct.
But, legal issues play an important role here as well. You should keep in mind:
You don’t want every customer that comes your way – you only want those:
1.) for whom you can provide great value; and
2.) who recognize that value and are willing to pay for it; and
Repeat customers are better than one-time customers.
Some customers have completely unrealistic expectations or expectations that don’t match what your business can provide. Some just don’t understand how your business provides value or are solely focused on price and nothing else. Some might also not intend to live up to their end of the bargain by paying. Taking the time and spending the money to acquire these types of customers and to service them will reduce profitability and business value.
Also, because the marketing and sales expenses can be spread over greater revenue, repeat customers are almost always more profitable and have a greater and positive effect on business value than one-time customers.
Both circumstances can benefit from a good written customer agreement.
A good written customer agreement is a business tool that will:
Educate customers and sets expectations about what your business provides and how it works;
Delineate what the business will do for the customer and what the customer must do to achieve the result;
Act as defensive shield, should a customer seek to abuse your business, want more than you’ve promised or make a claim;
Weed out customers that aren’t appropriate for your business;
Make buying from you an easy process with little effort that can be repeated over and over; and
Help ensure you get paid.
The difference between a good customer agreement and one that isn’t are detail and readability. There must be a level of granularity to what, when and how things are to happen that covers the process from beginning to end. The agreement must also be readable without a law degree, otherwise the customer won’t read it or will send it to legal counsel and defeat the business purpose.
All the important aspects of the relationship must be spelled out in the agreement and in detail, including:
What your business will do and when and how it will do it – setting specific and detailed expectations to avoid misunderstandings.
The specification against which the results of the services or the operation of the products will be judged. Again, the more detail the better to avoid changing customer requirements as services are being rendered or products are being manufactured.
What the customer must do (above and beyond paying) for your business to render the service or provide the product (e.g., meetings, materials, documentation, etc.).
A set period during which the customer will inspect the results of the services or the products. This is important to avoid extended inspection periods and, possibly, delayed payment.
Warranty rights and conditions (e.g., who pays to ship the product back for warranty repair).
Payment terms, including exact costs, timing for payments and interest and late fees in the event of untimely payment.
The process should also be streamlined with a set of “standard terms” that are used for the life of the customer relationship and with variables that are modified to reflect the special circumstances of each purchase. Standard terms ease the process of buying multiple time by eliminating the need to agree on new contracts for each purchase.
A well prepared, detailed and readable “standard” customer agreement can lead to consistent and greater sales from quality repeat customers and increased business value.