Small business owners need to be aware of the legal nuances when negotiating the supply of goods or services.
In this article, we analyze the risks associated with the deal of a lifetime, i.e. where a small business is afforded the unique opportunity of serving a much larger, multinational customer as its supplier of goods and/or services.
In general, large multinational companies do not necessarily deal with similar-size suppliers. In fact, most of the time they are looking for specialized knowledge and skills, and/or a bargain. A younger company often has more flexibility to innovate, and at a lower cost. Multinationals will express no reservations about dealing with a small company unless or until the relationship goes South and then it is common for such large customers to claim that a so-called defective performance was due to the “supplier’s small size” or “lack of resources.”
As such, when beginning a negotiation with the large customer of a lifetime, it is important to prepare your business proposal carefully and be conscious of the risks such a relationship may involve.
Prices Should Be Quoted Fairly
Prices should include a reasonable profit margin for the supplier. The supplier should resist pressure from the larger customer to quote rock-bottom prices to provide the best available price, while also resisting the temptation to quote at less than current prices.
It is often perceived that adding the name of such a prestigious customer to the supplier’s list of clients will greatly enhance the supplier’s reputation and possibly result in purchase orders from the same multinational or attract other desirable clients, but this expectation may be illusory.
Case in point:
- First, the large customer may contractually prevent the supplier from advertising their relationship so the marketing advantage to the relationship may be overstated.
- Second, reduced or non-existent profit margins for the supplier can lead to diminished performance which could end up resulting in the supplier’s losing business opportunities and/or having to risk breaching the contact and entertaining litigation to stanch the financial bleeding.
- Finally, while the small supplier is striving to meet the burdensome demands of its larger customer, competitors may be moving forward with contracts that are more lucrative for them, and/or engaging in programs of innovation because they have the time and resources to do so.
Outsource Some Specialized Services or Components
One way of reducing the risks of not meeting the requirements of a larger customer may be for the supplier, itself, to outsource services or components to other suppliers specializing in relevant areas so as to capture their efficiencies and take advantage of cost and time savings.
Dealing with a Foreign Customer
When dealing with a larger customer based outside the U.S., the supplier also needs to consider the extra costs and loss of time associated with travel, which may be required to ascertain the requirements and applications of the foreign customer. Export regulations and potential tariffs may also need to be considered.
Are Funds Available Internally to Manufacture?
Assuming that the deal of a lifetime requires the supplier to expand its manufacturing capacity to meet the scale requirements of the customer, additional financing may also be required.
The supplier can turn to commercial banks to obtain working capital financing, with, in some cases, the support and guarantee of the U.S. Small Business Administration, which can help the supplier secure loans at preferential rates. Usually a supplier will be required to grant security interests in its equipment and receivables. The owners of the supplier may also be called upon to provide personal guarantees, and even to put their residences up as collateral.
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