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Finger on fine print of contracts

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Many a small business has failed due to being caught up with (or caught out by) a major customer contract. There is some good advice in this article by Russell Emmerson and there are ways to protect yourself.

THIS is it. The one contract that will propel your business beyond its small roots on to the national stage.

However, before you wave your banners and shout your name from the rooftops, be warned: Look for the red flags before celebrating.

Understanding your dream contract can stop the nightmare, Kelly & Co partner Lisa Jarrett says.

"It is simple - you have to make sure you comply with its requirements," she says.

Nooks and crannies

Jarrett says businesses are likely to be aware of pricing, quantity and term of a contract but readily overlook essential elements. "Who has the right to terminate and when?" she says.

"If the other side can terminate with seven days' notice, you may get stuck with stock and unavoidable costs.

"Say to them: If you want extra flexibility, then we need something to meet those costs. "The same holds true of unlimited liability. If there are no dollar limits within the contract, you may get saddled with the worst of everything.

And while some elements cannot be set aside - think consumer liability and franchising laws - there are certainly enough risks to pay attention and ask questions.

"If you are sharing your business information or assets (under the contract) you need to make sure there are appropriate confidentiality and intellectual property protections in place," she says.

Are you ready?

PwC partner Michael Browne says businesses often underestimate the true demands of their dream customer.

He tells of wine suppliers who sign the ultimate deal - a contract to supply British supermarket chain Tesco with quality Australian wine.

However, what happens when the business ships three pallets of wine, only to find the order is for hundreds of pallets?

"You need to understand what the demands are going to be," he says.

Part of that answer lies in cold, hard cash.

Check the contract for payment terms. If you are stuck with huge stock purchases that are payable within 30 days while your key customer is only committed to paying every 45 days, you will quickly find your business starved of cash.

Invoice factoring - effectively borrowing on the strength of your signed invoices - is ideal for this situation, but talking with your suppliers, who will also be benefiting from your success, may also throw up alternatives.

Living the dream

Major customers often want their dues.

Check whether your contract demands exclusivity, whether it grants your customer the first right of refusal when you want to sell your business or even the right to buy it.

"It is about the customer being confident that he understands who he is dealing with," Browne says.

Jarrett says businesses need to determine whether contractual terms are reasonable.

"If it's unreasonable, it may be ineffective but it's better not to have it in the contract in the first place because you'll still need to go to court to prove it's unreasonable," she says.

The Australian Competition and Consumer Commission is the first port of call to assess restrictiveness, she suggests, while your lawyer will know more about your business to assess its impact.

That naked dream

Browne says it may also demand you open your books - allowing a customer to see how stable your company is, but also how much money you're making from them.

"They might ask for an audit statement or a statement from your accountant each year," he says. "But that's a risk you run.

"You might restrict them to gross sales and costs of goods sold, especially if they are just after financial solvency, but if you want the contract, it's something you will have to come to terms with."

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