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SBC Team

It’s all (re)negotiable!

Posted by SBC Team in Accounting and Budgeting on Sep 20, 2010 3:14:00 PM
Renegotiating your existing business contracts is an excellent way to keep revenue consistent in an economy that can be anything but

By Max Berry

While you may not feel like you have the leverage to redefine the terms of a business agreement, doing so can help keep you in the black during tough economic times and open a mutually beneficial dialogue between you and your partners. And besides, it never hurts to ask.

What can be renegotiated?
The first step toward redefining the terms of your business agreements is determining which of your contracts are ripe for renegotiation. Begin by analyzing all of them and identifying those that may be redefined in a way that benefits you without giving short shrift to the other party. Contracts eligible for renegotiation may include everything from your office equipment leases to your agreements with vendors, suppliers, and outsource workers.

In the instance of a pricing agreement, long-term fixed-rate contracts may have been made in a boom time, prior to a subsequent market drop, rendering your current contract out of sync with the current realities of the market. The same kinds of fixed-sum contracts with customers may also mean you're selling goods at a greatly diminished profit or, even worse, at a loss. Look for market discrepancies like this in your own contracts.

If you operate from a storefront or office, you may also want to renegotiate your lease contract with your landlord. When property values drop, so do rents. Your landlord would likely much prefer to renegotiate with an existing tenant than risk leaving a property vacant.

Renegotiation dos and don'ts
Before you take part in a renegotiation, figure out what you spend each year on the goods or services in question, then determine how much you can afford to spend on them going forward. Give these revised terms to your vendor and ask them to come back with any adjustments of their own. If you pay your bills promptly, you can use that as leverage for renegotiation; your timely payments help your associates with their own cash positions. If you make your case well, are candid about your own financial situation, and have a longstanding relationship with the vendor, there is a good chance the negotiation won't need to go any further than this.

If more negotiation is necessary to reach an agreement, do some research about your vendor: who are their other clients? What are market conditions like in their industry? By learning all you can, you'll reach a better understanding of their needs and how much leeway they can afford to give. As you're negotiating, make it clear that you've done your research; speak in terms of the big picture, not just your own needs.

For a negotiation with a landlord, it is best to begin the process at least six months before the end of your lease. Let your landlord know that you can no longer afford your current rent-or, as the case may be, that you know of a similar property at a better price-and that you are prepared to move your business elsewhere. Most landlords will be accommodating, but bear in mind that they will be much more willing to negotiate if you agree to extend your lease for a year or two at the revised rate.

Hiring a lawyer to help you renegotiate has its benefits; attorneys know how to interpret contracts in ways that are beneficial to their clients. But a lawyer will also cost you as much as you are likely to save on the renegotiation. Also, threatening to sue is hardly the best way to engender sympathy or foster compromise with a business associate.

The "same boat" rule
When renegotiating, remember that your vendors are your partners, not your adversaries. If your reasons for renegotiating are tied to broad economic woes, chances are the party with whom you're negotiating is in the same boat as you, and will be willing to bend a bit to keep your business; losing it would likely cost much more than it would to cut you some slack.

If contract holders are reticent to renegotiate, the best course of action may be complete honesty. Be candid about the economic conditions you're facing. Make it clear that some simple cost cutting could be the difference between staying in business and going under. But don't forget that a win-win scenario is not out of the question. Ask your contract partner what you can give in return for what you hope to get. Ideally, you've established a longtime partnership with your vendors. If you've paid higher rates during good times, it should be natural to pay a bit less in tough times. First and foremost, remember that you both signed a contract with the ultimate goal of helping each other. You're still in this together.

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