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B2B Sales | Let’s get legal – The customer contract!

The B2B Sales Playbook (Part 5)

This series on mastering ‘B2B Sales for Startup Founders’ is authored by Himanshu Goel who has 30+ years of experience in creating & executing businesses, pricing options, and sales strategy for Motorola, IBM, Microsoft & Cisco. Himanshu is also an active angel investor on the LetsVenture platform and a mentor to startups. His latest adventure was a self-driving expedition to the Mt. Everest Base camp! 

In Part 1, we addressed how you can arrive at your sales strategy & build your sales team!
In Part 2, we got into B2B Marketing and explored why sales & marketing can’t be divorced from each other!
In Part 3, we looked at how you can build a solid sales pipeline and manage it.
In Part 4, we talked about pricing options in the B2B ecosystem.
In Part 5, we will traverse through the legal implications in B2B sales!     

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Paying some attention to sales contracts with customers will also help avoid disappointments later. A simple and brief contract capturing the deliverables of the agreement (try & buy, PoC, actual sales), payment terms, post-sales support, and exit options should protect both the start-up and the customer.

Three things to note in a B2B contract in a start-up setting:

  • Capture the transaction – This is the basic thing of course. Whatever is being sold or bought should be described simply along with the basis for payment. Adding a list of inclusions or exclusions is always a great idea to avoid confusion late.
  • Power clauses – There are a few clauses pertaining to Intellectual Property Rights (IPR), indemnification, confidentiality, limitation of liability which protect a start-up’s core in the long run especially in a B2B setting. So, it is generally a good idea to spend that extra time negotiating and ensuring the contract is capturing this. Please don’t overlook this!
  • Exit clause – Capturing the circumstances or conditions of exit is, in my opinion, an extremely important element. Can anyone cancel the contract anytime and walk away? If this happens how are one’s rights protected? Does the customer pay for termination or does the vendor pay for damages?

I am always reminded of a large first-of-its-kind project I was delivering as a project manager in the mid-90s where the initial project investment was by us. Midway the customer decided to exit the project and we lost millions of dollars since the payment terms were subject to 100% project completion milestones and the sales team did not envisage this scenario while writing the contract. It was a tough lesson, well learned. We were a large company and absorbed the shock but a scenario like this could very well drown an early-stage start-up. On another note – the contract also serves as the glue between the two organizations.

Here is another example wherein a customer won’t give us much business and upon digging we found that the practice of signing a new contract for every project and each contract negotiations took 8-9 months. All this was a big waste of resources on both sides. A smart contract framework meant just adding the new scope, terms & price to the master contract reduced new contract signing with the old customer to barely 5 days. This unlocked major opportunities for us.

While we are on the subject of contracts, deviating a bit but due care should be taken when signing up with a vendor also due to care should be taken to negotiate the terms and the contract. Back to back terms, volume-based discounts, flexible payment terms, intellectual property rights are areas to negotiate.  

Collections, collections & collections!

All the hard work of creating a product or offering, pipeline generation, long customer engagement, many weekly calls and closing a deal, finally delivering the product should lead to collecting ₹₹₹ but it’s not that simple in a B2B setting. Each organization has a process to pay its vendors and we have no choice but to align with these systems at least for large customers.

There is however a method to this whole process.

  • Documentation – For most B2B customers, vendor registration and access to the vendor portal is the first thing before any purchase order (PO) is released. The invoices would have to accompany the copy of PO, acceptance sign off from the end-user, copy or taxation number, etc. Most businesses these days would release the PO on the vendor portal and accept the invoices along with supporting documentation on the portal itself before the payments are processed.
  • Understand customer payment process & aligning internal systems – An early conversation with supply chain and account payables of the customer organization will be very insightful and help you prepare internally for what’s coming. A checklist capturing the payable/escalation process and documenting the necessary paperwork is most helpful.
  • Follow up & escalation – A clear follow-up and escalation matrix is extremely important and helpful when the payments are delayed. Most businesses would not agree to late payment fees and in-person & regular follow up with the relevant customer officials is most effective in India. Aligning some percentage of sales incentive to collections is also helpful.

I’d like to share here a recent example: We had been sending invoices to a large customer for months, but no payments were being made. The whole organization was upset and once the double click began, it was discovered that the invoices weren’t being uploaded on the portal; but being sent on email and no one in accounts could understand which department is consuming the service and so all the invoices were being dumped in a corner. In another case, a government customer was expecting the invoice hard copies to be approved by HQ before being sent to payables. Both customers followed different processes and once the process was aligned the payment flowed almost as per the payment terms.

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That’s it in Part 5 – if you have any questions, our comments section is open. Also, watch out for our webinar with Himanshu, that’s coming soon!

In Part 6 of this B2B Sales Playbook for Startups, we will be focusing on ‘selling in a slowdown’

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