Growing a business alongside larger organisations can be daunting, especially when you’re entering their lengthy procurement processes or struggling to negotiate contracts. It can feel like a David-and-Goliath situation for scaling businesses and start-ups who must fight their corner against those with greater resources, leverage, and rigid processes.
To cut through that imbalance, we spoke with our Consultant Legal Counsel, Rustam Roy, about how such businesses can protect their interests and negotiate on equal footing.
You need to understand the power dynamics and be clear on your own leverage.
It’s easy to think that a large company holds all the cards. They might have more bargaining power because they have bigger budgets, dedicated procurement teams, governance layers, and ‘non-negotiable’ contracts.
But too often, scaling businesses underestimate their own leverage, which comes from
- Having a unique product or service (but you should keep in mind that this is not always the case)
- Being in high demand
- Being essential to the buyer’s goal (which is often relevant for tech SaaS companies)
- Being expensive to switch away from your products/services (such as a reliance on subscription services)
If your product or service is valuable or difficult to replace, that leverage can be used in negotiations. Scaling businesses should always be realistic, but never apologetic, about recognising the value they bring.
Working with corporate contracts requires a pragmatic approach
Large corporates will always push suppliers to agree to their own contract terms. This is normal and should be expected. But suppliers should be mindful that those standard terms are usually written to suit the corporate’s internal processes and risk approach, rather than the commercial reality of how the supplier actually delivers the service. As a result, those initial contracts are often inappropriate if accepted without change.
Having strong customer terms of your own is important, as they provide a sensible benchmark for how the service will be delivered in practice. This provides a strong foundation for negotiations, so the final agreement can better reflect how the service actually works.
The aim should be to focus any negotiations on the key commercial and legal points that matter most, rather than every clause. If there are certain clauses that are low risk in practice or unlikely ever to be enforced, it can be sensible to accept them to reach a workable, proportionate agreement.
Be clear about your position before entering into any contract negotiations.
Rustam recommends that before entering negotiations with any company, you should always be clear about your internal interests (which can include revenue-earning requirements set by investors) and set firm boundaries.
Commercially, you need to know what you can and cannot do, and what you should never accept. It’s often tempting for scaling businesses to say yes to any deal, particularly in the first year or two, when the need to drive revenue overrides almost all decisions.
Instead of focusing negotiations on theoretical legal risk, you need to think carefully about
- Delivery risks
- Cashflow limits
- Internal capabilities
- Insurance coverage
As Rustam says,
“Scaling businesses should act responsibly. They need to have plans in place for payment delays or nonpayment, and if an arrangement is not sustainable, to be prepared to walk away. There is a strength in that.”
Payment terms can be limiting, so scaling businesses need to protect their cash flows.
One of the biggest barriers to business growth is the payment terms imposed by larger corporates. While 30-day payment terms are common, many larger businesses will request 45-, 60-, or even 90-day payment terms, which are often very difficult for growing businesses to accept. These payment terms are often longer because large firms have complex finance operations, manage many suppliers with widely varying payment amounts and they adopt flow strategies that delay outgoing payments.
If you need to push back on a customer’s lengthy payment terms, back up your negotiations with objective facts explaining why those terms are unsuitable.
- Don’t be afraid to ask for staggered or milestone payments or upfront fees to mitigate your risks.
- As part of your decision-making, think about how your business could cope with any late or delayed payments. If you know it could cause operational or delivery issues, you must be able to explain the risks (for them as well as for your business) and be prepared to walk away if they won’t compromise.
What you should do if payment is not forthcoming.
There is UK legislation to protect smaller businesses from any unacceptable payment terms, and you should never start any work without a contract in place.
You should always have a complete paper trail outlining the scope of any requested work and the payment terms. That documentation (emails or ideally, contracts) will be essential if payment does not arrive. You also have the right to request statutory interest or compensation.
In a worst-case scenario, you can make an application to the small claims court to recoup any financial losses. But it’s important to remember that this should be a final-resort decision taken only if nothing else works, as any commercial relationship is unlikely to survive litigation, and it’s a drain on your time and resources as a business.
Make sure you know what’s reasonable when it comes to liabilities and indemnities.
This is one of the biggest legal minefields for businesses. Often, standard contracts from large corporates include many theoretical scenarios regarding liabilities and indemnities.
Indemnities, in particular, are often misunderstood.
- An indemnity is a promise to cover another party’s loss if a particular problem occurs. It allocates the risk up front and specifies who will pay.
- In contrast, a liability sets out who is legally responsible (and, if liability is limited, up to what amount) after something has gone wrong.
You should never accept any contract that asks for broad, uncapped indemnities unless those indemnities are market-standard. Nor should you be prepared to indemnify a customer for any and all risks that the customer may be exposed to in this relationship or accept liability caps above your insurance cover. Remember that the customer also has insurance cover, and that all commercial deals entail some elements of risk. The key aim in negotiations is to assign that risk fairly between the parties.
If you need to push back on a clause, use your objective facts to confirm, “This is what our insurance covers. If you need higher coverage, you need to pay that premium.” Rustam’s golden rule for businesses is to:
“Never sign anything that your insurance does not cover, unless you make a considered commercial decision that any benefits will outweigh any risks.”
Ultimately, every deal will involve some risk, so the real question is whether the benefits outweigh the risks and whether (and to what extent) you can mitigate them.
IP ownership is a crucial consideration.
Large companies often insist on clauses that assign them all intellectual property rights created while you work with them. But that’s not always possible, especially in particular sectors where you might be working with pre-existing tools or templates or where you re-use some intellectual property for more than one customer.
You should always protect your own business, particularly when it comes to internal knowledge, processes, or frameworks.
- A reasonable compromise is to assign intellectual property for explicitly defined deliverables, not for everything you create.
- You need to explain why that full IP assignment is inappropriate. Often, procurement teams don’t understand the nuance of IP, so your objective facts can protect you.
What regulatory requirements are you signing up for?
Often, large organisations will push extensive compliance requirements onto scaling businesses because they need an audit trail across their entire supply chain. These requirements may exceed what the law mandates. In most cases, these policies are not negotiable (especially for smaller suppliers), and you will need to balance the theoretical or real risk you take on with the revenues you may gain.
It’s important to make sure you’ve read all the policies and understand your obligations before signing any contract. Many corporates will not collaborate with a supplier, no matter how good their product is, unless the supplier agrees to these policies, because such rules or decisions are made at the board level. You should only ever accept obligations you can meet and (importantly) insure, or obligations where you can mitigate your level of risk through your own internal processes.
If you need support reviewing your customer contracts, updating your terms, or negotiating with larger corporates from a position of strength, our fractional in-house lawyers can help you identify what’s worth pushing back on – and what you can confidently accept.
