“This is a fairly typical ‘big [company] MSA [Master Services Agreement], with lots of overreach and terms that are not applicable to the nature of your services. This is why the issues list is lengthy.”
-Email from my attorney after reviewing a sales agreement with a large company
Are you a small company selling to big companies? If so, are you banging your head against the wall because of their contractual obligations? You aren’t alone. One recent contract I negotiated required that if the big firm fires us, we are obligated to spend our money and time finding them a new vendor that provides similar work—even if we didn’t default. Really?
The process of managing big company contracts requires patience and humbleness. I have more than 15 years of experience negotiating these deals – so here are six tips that could help you:
- At all costs, protect your intellectual property: Danger, Will Robinson. DANGER! Some founders try to save money by bypassing their lawyer’s review agreements. Don’t do that. Protecting your intellectual property is the main goal of these agreements. I can’t tell you how many MSAs read in the fine print, “Any enhancements or improvements are hereby owned by BIG FIRM.”
- Don’t sell to big companies: Many successful founders find the process of negotiating and selling to large companies too arduous, so they avoid them all-together. Nothing wrong with that approach; it’s a cost/benefit decision. Sometimes you can grow faster by avoiding big businesses because you won’t become distracted by their requirements. An online restaurant employee-scheduling firm, Schedulefly, made that decision, and it’s paid off well. Partner Wil Brawley warns about big business in a post: “…you start out serving small businesses, who have simple needs, but you get enamored with the idea of serving larger businesses because they would pay more money for your services… Before you know it, simple and fast becomes complicated and slow.” Bottom line: There’s no law that requires you do business with big firms.
- Don’t waste your money and time negotiating trivial terms – no matter how unfair and one-sided they may seem: Most big companies employ their own lawyers who must justify their jobs. But small companies have to hire outside attorneys who are working on an hourly basis. The typical MSA requires all types of one-sided provisions such as the right to audit you at a moment’s notice, review your financial statements, or that you have to abide by their HR policies, and so forth. Just accept those terms or you’ll end up spending a fortune in legal fees, slowing the process, and getting nowhere quickly.
- Charge implementation fees to recover your legal fees: A typical big company contract negotiation costs my business between $2,000 and $5,000 each, assuming no major disagreements arise. In the past, we didn’t incur these legal fees so we didn’t charge implementation fees. But today we do, so we request them.
- The longer the term, the greater the contractual risks: Most small businesses reduce their risk with longer term deals, but keep in mind, the longer the term, the more the agreement matters because if you get into a mess, you remain stuck in that mess.
- Pay attention to representations, warranties, and indemnifications: Representations are promises you make; warranties are guarantees you make; and indemnifications are when the shit hits the fan, you’ll have the big company’s back. These provisions are critical in the courtroom if, heaven forbid, you ever end up there. Big firm MSAs often make you rep, warranty, and indemnify them for everything, and yet they won’t make these reciprocal. I normally request they are as mutual as possible.
I have one last tip – Stay strong and good luck! LOL
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