Verbal agreements with suppliers might appear solid, but without a contract, your business could be on shaky ground.
There is a difference in Australian Law between a legally binding agreement and an informal verbal agreement.
Inspiring Business do not hold ourselves as Legal Advisers and you should seek Legal advice from a suitably qualified professional before making any decision relating to this information.
Business relies on contracts to establish clear expectations and protecting the interests of all the parties. Most business owners are aware of the need to have contracts with clients and employees.
There is one area that often gets overlooked: supplier contracts.
Be cautious if a supplier does not have a process to provide you with their ‘terms and conditions of supply’. You might think this gives you flexibility to leave the arrangement at any time but that is the same position they hold over you.
And if the supplier has a significant ‘input’ to your product or service delivery, then not having an agreement in place leaves your business vulnerable to unexpected disruptions and has the consequence of a short term revenue impact as well the longer term business valuation if it’s not addressed.
The Risks of Relying on Verbal Agreements
Relying on verbal agreements with suppliers might appear like a simpler, more trust-based approach, but it comes with significant risks.
Without a formal contract in place, suppliers are not obligated to continue providing their products or services, even if you have had a long-standing relationship. This can lead to sudden losses of crucial components of your business, disrupting your operations and impacting your revenue.
Even if you have an agreement in place, have you looked at the ‘Termination clause’ and the reasons the agreement can be terminated, but more importantly the Notification Period.
Here are a few real examples that came out of the blue and had a significant short term impact.
A wholesale business lost distribution rights to a product that made a significant contribution to the revenue. The supplier decided to change their strategy and gave the wholesaler gave notice that was in the agreement. Just 3 months. There had been informal discussions that the supplier had “no intention of entering the Region” so the wholesaler trusted that the 3 months was just a legal formality.
The impact was a massive disruption to the operations.
The warehouse had to be redesigned and sub-let
The Customer Service team went into overdrive to handle customer queries.
Staff attached to the product had to be redeployed
The financial had a massive overhaul to address the short term cash-flow impact.
Not to mention the increased stress level of the owner and the concern of the employees on their job security.
In another real life situation, a service based business has an agreement with a large conglomerate to provide SaaS services as a regional distributor. Even though the business has, on many occasions, attempted to secure a formal arrangement to secure the distribution rights, the conglomerate is wriggling like a slippery eel.
Massive Red Flags that require an alternate strategy to be considered.
The impact is:
The business is reluctant to invest in any major marketing initiative for fear of it being too successful and bringing into focus of the conglomerate. Ironic no?
A potential investor did their due diligence and uncovered this potential risk and walked away when it became clear there was little chance of negotiated agreement.
The business is spending management time and resources to investigate and develop a Plan B which is likely to be an asset build for the owner outside the business.
The consequence of this strategy is is sucks out the profits that were used to reinvest into the business. Another ironic consequence.
The Impact on Business Valuation
The absence of supplier contracts has a significant impact on your business’s value. When potential buyers or investors assess a company, they look for stability and minimised risk.
If your business relies heavily on verbal agreements with suppliers, it introduces uncertainty and potential for disruption, making it less attractive to buyers.
Formalising supplier relationships, on the other hand, demonstrates a level of stability and risk management that enhances your business’s value. It shows that you have taken steps to secure the continuity of your operations and protect your business from unexpected supplier changes.
Steps to Safeguard Your Business
To protect your business and its value, it’s crucial to prioritise formalising supplier contracts.
Start by identifying your key suppliers and assessing the importance of their role in your operations.
Initiate discussions with these suppliers to convert verbal agreements into written contracts.
Work with legal professionals to draft contracts that clearly outline the terms of your agreements, including the scope of products or services, pricing, delivery timelines, and termination clauses.
By proactively securing supplier relationships, you can mitigate risks and ensure the stability of your business.
Be aware of the risk and take action
In the fast-paced world of business, it is easy to overlook the importance of supplier contracts. However, neglecting to formalise these agreements can leave your business exposed to significant risks and negatively impact its value.
By taking steps to review and secure your supplier relationships, you can protect your business, ensure its continuity, and enhance its worth.
Trust is a rare commodity
Don’t let handshake deals shake your business value. Take action today to formalise your supplier contracts and safeguard the future of your company.
If you need guidance or support in this process, don’t hesitate to reach out to us as a trusted advisors who can help you navigate this crucial aspect of business management.
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