How to negotiate a contract with your vendor

Contracts define the success of any business relationship. A good contract takes care of all contingencies and makes sure that both parties are appropriately compensated when something goes wrong. But as it is with any business transaction, one party always holds the upper hand during negotiations. If you are a startup business, you may need the vendor more than they need you. Negotiating a contract that sufficiently addresses your concerns is paramount to the success of your business.

Identify your value to the vendor

Vendors have a business to run too and are keen on expanding them. One of the best ways to ensure you have an equal say during contract negotiations is by putting forward the value you bring to the table. You could perhaps help the vendor reach out to a newer industry or market. If you are a well-funded startup, you may perhaps have connections with the investor community that the vendor may benefit from. Underlining the value you bring makes the relationship lucrative for your vendor and they are more likely to heed to your demands during the contract drafting process.

Volume based pricing model

If you are an early-stage business, chances are that your demand could dramatically grow over time. It may not make sense to draft a year-long contract taking your prevailing order volumes into account. You should instead insist on drafting a pricing clause that accounts for possible price changes when volume increases. This way, your business can ensure better margins when you grow your business. Also, it avoids any need for renegotiation at a later stage of the contract period.

Watch out for waivers

One very common trick used by vendors is to use price negotiation as a tool to get around various contract obligations. For instance, your vendor could agree to the price requested by you on the condition that you also waive the right to file a lawsuit against them and instead take the arbitration route. Depending on the clauses in your contract, this can debilitate your business since your customers might still get to sue you for inefficiencies in your vendors’ offering.

Contract renewal clause

It is standard practice to include a clause in your contract that allows for automatic renewal of the agreement upon the expiry of the current contract. Depending on your industry, your vendor may request a unilateral percentage increase in pricing upon the end of the current contract period. In some cases, this may be standard practice too. However, as the buyer, negotiate for either the removal of this contract or request for an edit that provides you with an option to renegotiate prices at the end of the contractual period. Market conditions, as well as your business prospects, evolve constantly and agreeing to a price increase at a later time may come back to haunt your business.

Termination clause

Ending a relationship in the middle of a contractual period can be devastating to both you and your vendor. It is natural for a vendor to request a lengthy notice period that will provide them with the resources to steady the ship in case you end the relationship. As a buyer however, you should not be forced to continue a relationship in case your vendor does not fulfill any particular obligation. One way to do this would be to separate your termination clause into two parts. You may have a lengthier notice for mutually agreed suspension of service while keeping this notice very short for when the vendor fails to meet certain obligations.