The value of contracts
Discussion
I always have an eye on the day that I am able to bow out of my business, and a forthcoming expansion gives me the chance to get that new part of the business on a stable basis and then move on..
I have seen the various posts about how to value a business but one area where I have a question is around the value of formal contracts:
At the moment we have a list of around 30 clients who use our services: they call and if we have capacity to do the work, we do it. If not they have to wait or find another supplier. They rarely look elsewhere and have learned to book time for bigger jobs well in advance to ensure they can meet their own deadlines.
To date we have a written contract with only one of them which sets out the notice periods required of them to warn us we are required to do their work, the volumes of work with the speed of delivery of the work and the price. Because of the nature of their business they cannot guarantee having any work for us and reserve the right to keep the work in-house or allocate it elsewhere. As I see it the contract has no value to us, it is really just a comfort blanket for them to know that should they need us we will deluiver to their deadlines at a fixed price. We could decline to sign it, in which case we risk losing the work as they want assurance of service to hit key deadlines. The only real use the contract has to us is that a cancellation charge is included, which would have been useful once or twice this year when promised work has not materialised when we have allocated time.
Recently I have been thinking about what £££ value a contract which actually guarantees no work, but which places obligations on us to deliver on request realy has. Not withstanding the cancellation clause the best I feel it shows is some intent on their part to use us and for the past 4 years they have sent work which we have completed as per the contract. What is that worth when we come to sell up?
If the contract has £££ value to us I did consider offering our other 29 clients the same contract, but feared that too much committment of our time to deliver to tight deadlines on request might hamstring any person buying the company from me when I pack it all in.
What would you do?
I have seen the various posts about how to value a business but one area where I have a question is around the value of formal contracts:
At the moment we have a list of around 30 clients who use our services: they call and if we have capacity to do the work, we do it. If not they have to wait or find another supplier. They rarely look elsewhere and have learned to book time for bigger jobs well in advance to ensure they can meet their own deadlines.
To date we have a written contract with only one of them which sets out the notice periods required of them to warn us we are required to do their work, the volumes of work with the speed of delivery of the work and the price. Because of the nature of their business they cannot guarantee having any work for us and reserve the right to keep the work in-house or allocate it elsewhere. As I see it the contract has no value to us, it is really just a comfort blanket for them to know that should they need us we will deluiver to their deadlines at a fixed price. We could decline to sign it, in which case we risk losing the work as they want assurance of service to hit key deadlines. The only real use the contract has to us is that a cancellation charge is included, which would have been useful once or twice this year when promised work has not materialised when we have allocated time.
Recently I have been thinking about what £££ value a contract which actually guarantees no work, but which places obligations on us to deliver on request realy has. Not withstanding the cancellation clause the best I feel it shows is some intent on their part to use us and for the past 4 years they have sent work which we have completed as per the contract. What is that worth when we come to sell up?
If the contract has £££ value to us I did consider offering our other 29 clients the same contract, but feared that too much committment of our time to deliver to tight deadlines on request might hamstring any person buying the company from me when I pack it all in.
What would you do?
Edited by Leftie on Sunday 22 October 15:28
Edited by Leftie on Sunday 22 October 15:29
unless i have missed something here i don't think this contract is worth anything to your or your potential purchaser.
in reality what you have agreed is terms and conditions from their point of view- basically they have said if you can deliver like this then we will consider using you, or is it stronger than that?
I have a couple of arrangements like above, as i see us getting the work, but there is nothing to stop them moving away. i only have one true contract to provide service for 12 months as i had to tool up to complete the contract- we get funds if they pull out!
i wouldn't push any more arrangements unless it beomes a prerequisite to doing business- and i don't think i would make a big deal of it.
in reality what you have agreed is terms and conditions from their point of view- basically they have said if you can deliver like this then we will consider using you, or is it stronger than that?
I have a couple of arrangements like above, as i see us getting the work, but there is nothing to stop them moving away. i only have one true contract to provide service for 12 months as i had to tool up to complete the contract- we get funds if they pull out!
i wouldn't push any more arrangements unless it beomes a prerequisite to doing business- and i don't think i would make a big deal of it.
Leftie said:
As I see it the contract has no value to us, it is really just a comfort blanket for them to know that should they need us we will deluiver to their deadlines at a fixed price.
They really ought to pay for that assurance - might it be possible to get the firms that you work with to pay you a retainer, or guarantee you a minimum amount of work per year?
Leftie said:
Recently I have been thinking about what £££ value a contract which actually guarantees no work, but which places obligations on us to deliver on request realy has.
I don't think that's worth anything. In fact, it's surely more of a liability than an asset, as you really ought to account for the possibility of having to buy in labour or pay penalties (or whatever) if you were called upon to perform in line with the contract and you couldn't.
deva link said:
Leftie said:
As I see it the contract has no value to us, it is really just a comfort blanket for them to know that should they need us we will deluiver to their deadlines at a fixed price.
They really ought to pay for that assurance - might it be possible to get the firms that you work with to pay you a retainer, or guarantee you a minimum amount of work per year?
Leftie said:
Recently I have been thinking about what £££ value a contract which actually guarantees no work, but which places obligations on us to deliver on request realy has.
I don't think that's worth anything. In fact, it's surely more of a liability than an asset, as you really ought to account for the possibility of having to buy in labour or pay penalties (or whatever) if you were called upon to perform in line with the contract and you couldn't.
It feels like a one way street but I notice other clients are now starting to ask about a similar contract (customers talk to each other). I think it best I stay clear.
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