How important is it to have contracts with clients? Does having contracts become more important when I am thinking of selling my business?
I’ll bet that the majority of landscaping companies, regardless of their size, do not have all of their contracts in writing, properly reflecting their current services and prices. Many won’t even have contracts that apply to the current time period. Note: this is not limited to landscaping companies—I could say the same about many different types of companies with both residential and commercial customers. It’s no surprise, really. The entrepreneur and top managers are not usually people who want to be in the office working on administrative/legal/accounting details.
We all know what a contract is, right?
Contract – An agreement between two or more parties whereby each party promises to do, or not to do, something; a transaction involving two or more individuals whereby each has reciprocal rights to demand performance of what is promised. From Barron’s Dictionary of Business Terms
In a business where you are providing services to customers, isn’t this where you define what you are going to do, how and when you are going to do it and what you will be paid for performing those services? I often hear that “we don’t want to go back to the client because they might want to send the contract out for re-bidding”. Sometimes that might be truly strategic, but not often. In many cases, I think it’s like call reluctance. Senior managers and owners don’t want to “get in the weeds” with details and don’t see the possible upsides of effective contract management. But many times these are the same contractors who have customers who are delighted with their services!
What might the upsides be from better contract management? Among others, More Money! May I suggest the following:
1.) Have someone be responsible for reviewing the contract at least annually and give you a summary of:
- When did we start our relationship with this customer, what did we say we would do in writing and how well have we delivered? (Are you doing customer satisfaction surveys? Why not?)
- Was the pricing set properly now that we have experience with performing the services? (Are you reviewing Gross Profit by job? Why not?)
- Are we {still} compliant with the insurance and permitting requirements for the various municipalities?
- Are our services, standards of performance and prices current in today’s market? Can we/should we increase our prices?
- Are there opportunities to increase our scope of services based on current market?
- Is this an Ideal Customer? Would we have better profits with a different customer? Should we drop our least profitable relationships (especially in a time of labor shortages—you want to be using your teams for maximum profitability)
2.) If you manage the contracts and the corresponding relationships, you will be in better shape when it comes time to sell your company. You will know when your contracts are competitive and where there are opportunities for improvement. Buyers want to know that the relationship, as evidenced by the contract, is being well managed. Better managed, more stable profitable customers result in higher price paid to Seller.
The best performing companies are on top of their customer contracts. These owners and managers know who their most profitable customers are. They manage contract and property-level relationships to make sure their customers are enthusiastic promoters of their services. (They will have a strong Net Promoter Score!)
Does this describe you? It could!
Where are you in your process? If you’d like to discuss your situation, selling or buying a business or preparing your business for sale, please let us know. In the meantime, if you have questions or comments, I can be reached anytime via email: [email protected] or phone at: 224-688-8838. We’re here to help you harvest your potential.
