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:
1.) for whom you can provide great value; and
2.) who recognize that value and are willing to pay for it; and
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:
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:
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.