SMEs are frequently obliged to do business with larger businesses, both clients and suppliers. Whilst these situations can be huge opportunities and often transformational in nature, they can also present significant challenges for many small business owners. Without access to expensive legal resources, small businesses have to fend for themselves in a sea of complex legal language and onerous obligations that can appear to be insurmountable.
However, following a few basic guidelines and strategies during the contractual negotiation process is the key to staying sane, grounded and getting to the other side, hopefully with a positive and mutually beneficial outcome.
How did we get here? Understanding the landscape and your points of leverage
Let’s look at an example where a small service provider is engaging with a client who is much bigger than they are in terms of revenue, resource and scale. Think of a sub-£1m business contracting with a client that has revenues in excess of, say, £250m. The opportunity for the SME is substantial and could be truly transformational if they are successful and can grow the relationship. Some of these large organisations are “markets” in their own right, and positive feedback on the initial project(s) can lead to more business with other client stakeholders across the business.
Selling into a large organization is rarely the work of a single person. Perhaps your best salesperson has created the opportunity through smart networking and has “warmed up” the prospect across several weeks with strong engagement and compelling demos to the client userbase. As CEO you have been pulled in to handle the legal contract. This is a common pattern that we have seen many times.
So don’t forget the important touchpoints that have been created with the client. Use your salesperson and the project manager’s relationship in a positive way to ensure that things are ready to go, and that the relationship is always positive. Maintaining a strong relationship with as many client touchpoints as possible is leverage as the negotiation with the legal team kicks off and will be helpful on the way through.
One size rarely fits all
The SME may have a contract that it uses, but it may not. The large client will almost certainly have a draft form that it wants to impose on all of its suppliers to keep its own life easy. It will probably have a corporate legal team (internal counsel) and matters will be handed over to them early in the process.
This is where it is important to take half a step back and look at the nature of the client contract. Does it fit the business service that you are providing? Does it reflect your business model? For example, if it is a standard service contract and your business provides services through a platform via a SaaS model, then there will be important differences in key areas of the contract, especially around Intellectual Property. The big company “cookie cutter” approach does not necessarily allow for much variation and the legal team will have to invest time to understand your business.
But this is so critical it is worth time and effort on your part to ensure they do understand your business model, otherwise you and they will spend hours of wasted energy trying to force a square peg into a round hole.
Knowing how far you can push and being aware of your own “red lines”
There will undoubtedly be clauses in the contract that are unacceptable to you. These typically include liability (in the case of service provision failure, for example), indemnification (if things need to go to court), and termination. You may read these and think that should you sign the contract your business will go under if it makes one tiny mistake! But things are rarely as immoveable as they seem. Your approach to these clauses needs to reflect the size and scale of your own business, the level of insurance that your business carries, and the probability of a nasty event actually occurring. Contracts are written for the worst case, typically when relationships fail, and they need to envisage a “doomsday scenario” that will probably never be encountered.
You should never feel unable to push back in a positive way. Suggest other ways through a situation, contextualise a difficult scenario for the client, and always remain positive and upbeat.
It is far better to approach things in a constructive manner, for example:
- “…we can accept the vast majority of your language changes but there are a couple that are very difficult for us for the following reasons…”
…rather than:
- “…the language in clause X and Y is totally unacceptable to us…”
Always think about how things land. Put yourself in the client’s shoes and think and about how you would react if you received your email. But it is also critical that there are “red lines” that you cannot cross. A smart lawyer will understand the context (assuming they understand your business – per the first point above) and should be flexible.
Your team’s engagement here is also important. If both sides are ready to go from a commercial standpoint, there will be more impetus behind getting the contract over the line. If you have to say “No”, this may not be the end of the line if the relationship is positive and there is a willingness on both sides to move forward.
Having said all of this, always try to be responsive. If things go cold, they are harder to pick up by the client’s legal team. A 24-hour turnaround is much more helpful than a 72-hour turnaround.
How we can help
We have deep experience of both sides of the negotiation fence, having worked in multi-billion $$ corporations as well as in start-ups and very small businesses. Bringing professional expertise and rigour to bear is really important and will gain respect by the other side if arguments are positioned professionally. This approach is important regardless of business size, and we always work towards solutions that have mutual benefit.
We are totally flexible in the way we engage – we can lead negotiations or act as a sounding board in the background. We can help to draft and review legal language, and there are very few contractual situations that we haven’t encountered.
So please don’t hesitate to get in touch if any of this resonates.