The Hows, Whys and Substance of Service Contracts

You don’t have to be a doctor to take care of your health, and you don’t have be an attorney to utilize legal instruments to the best advantage of your business.

Anyone who has been in this business for a while has run into the client from hell for which they have diligently completed all services requested, only to find out that this client expects more and more. This is one reason that you should have all of your accounts under contract.

The short definition of a contract is: “A definite agreement between two or more competent parties, based on lawful consideration, to do (or not to do) some lawful thing”.

Because the term “contract” can sound a bit ominous, some people prefer the term “agreement.” I prefer the term “contract,” because it means one or more agreements within the contract while the singular term “agreement” sounds as though only one agreement was made. Whether you call it an agreement or a contract, it is a contract under the law when properly written.

Will it stand up in court?

The usual question regarding contracts is: “Will it stand up in court?” This is probably not the most important question here. This industry is not as litigious as some, primarily because it’s a cash business, employing movable assets. The principal value of the location agreement is the client’s commitment to a long-term relationship and the clear delineation of who does what, how and when.

If we can get out in front of the selling process, beyond merely responding to bid specifications, contractual arrangements can be established which are less one sided and have more of a joint venture flavor.

Accounts are not covered under location contracts for a few reasons; the vendor never asked for one, the vendor went about getting one in the wrong way, or the client refused to sign.

Make every possible effort to get a location contract whenever a new account is sold. Always include a completed draft contract (not a fill-in-the-blanks sample contract) with your proposal. Include this straightforward statement on your Website and in all sales materials: “XYZ Vending requires a service agreement that provides our clients with a host of benefits.” It is important to focus on the rewards of a contractual relationship, for the client.

Regarding your existing accounts not under contract (every company has a few), asking the client to sign a contract is risky. This may seem like a reasonable request from your prospective, however, it will almost certainly result in your client “checking the market.” If you’re willing to take the risk, go for it. Just understand that before it’s over, you may wish you had left it alone.

Here is a tip for gaining a contract in your existing accounts: couple your request with equipment upgrades or other service enhancements.

Two words never to use

First rule, wherever possible, stay away from these two words: NEVER and ALWAYS. Sure, you want to have the autonomy to run your accounts any way you want to, but keep in mind that everywhere you do business you are a guest on someone’s property. Everything you do or don’t do has an effect on the people there.

Most decisions you make regarding the scope of services at your locations will require the concurrence of your host. That’s not going to change; get used to it.

Despite your best efforts, you are going to run into people who just won’t sign. If it’s a good account, the investment minimal, and it doesn’t require holding receivables, take the business anyway. (I would not have said that 10 years ago)

Location contracts vary significantly, but there are common elements used in all of them. Two of the most important are the automatic renewal feature (evergreen) and the cure period preceding termination. Both of these clauses facilitate long-term account retention.

Two Common clauses

“The term of this Agreement shall commence on date of signature and shall continue for a period of 3 years. The terms of this Agreement shall automatically be extended for successive 2-year periods thereafter, unless terminated by written notice, such notice to be given 60 days prior to the expiration of the term then in place.”

“If either party shall refuse, fail, or be unable to perform or observe any of the terms or conditions of this Agreement for any reason, then the party claiming such failure shall give the other party a written notice of such breach. If, within 60 days from such notice, the failure has not been corrected or appropriate steps taken leading there within this period, the non-breaching party may terminate this Agreement in whole or in part effective 30 days after the end of such 60-day period.”

Just a word about holding on to this business when the client wants you out. Sure, you can use the contract to stall and buy time to mend the fractured relationship or fix the perceived problem. This might work. However, if they want you out, you’re going out, contract or no contract. Do your utmost to give the client a reason to like you; this is much more likely to save the business.

Financial safeguards are advisable when guaranteed annual commissions or signing bonuses are used. The following types of clauses are suggested.

“Vendor will pay a monthly commission percentage of 12 percent or the guaranteed annual commission amount of $10,000, whichever is greater.”

“Vendor shall pay Client a one-time signing bonus (advance commission) of $10,000. Vendor shall internally amortize the signing bonus over a period of five years. If this Agreement is terminated by either party for any reason, prior to the full amortization of the signing bonus, then Client promises to pay to Vendor the unamortized portion of the signing bonus.”

“It is agreed that the financial terms as defined in this Agreement are based upon the current conditions and demographics in named locations as described by the Client. In the event that these factors should change and result in a decline in revenue or increase in costs, the Vendor shall be given adequate opportunity to estimate the cost of such and to agree with the Client upon revised financial terms. Such agreement will not be withheld or unreasonably delayed.”

Assignment clause adds value

You may never need the assignment clause, but if in the future you elect to sell your business and you could state in your prospectus that all accounts are contractually assignable, it will add value.

“Either party may assign this Agreement to an affiliated business entity without the prior written consent of the other party. This Agreement shall be binding upon the parties’ heirs, successors and assigns.”

Erosion of location sales often starts out with a charity gumball machine and then escalates to the sale of competitive wrapped candy and even specialty beverages. An exclusivity clause can protect against this.

“Client agrees Vendor has sole and exclusive right to place and operate vending at the named locations and that no other agency, company or individual shall have the right to sell products through automatic dispensing machines of any type on these premises.”

Customarily, selling prices require client approval before implementation. The skill and timeliness with which you present and gain acceptance to these changes will play a vital role in your financial success.

“Barring any increase in taxation, all pricing will remain firm for one full year from the date of execution of the contract. Subsequent to this period, increases in price, or percentage adjustment, may be required from time to time. In that instance, Vendor will provide documented evidence that such adjustments are warranted. Subsequent Client approval for financial relief requested by Vendor will not be withheld or unreasonably delayed.”

Here are some contract clauses that can be referred to as client benefits:

» “Prices shall be contained to a reasonable amount at, or below suggested retail, or not more than the average in the area. A wide variety of healthy foods and beverages are to be provided in addition to traditional food products, snacks and beverages.”

» “Detailed background checks of the Vendor employees engaged in the fulfillment of this Agreement will be conducted.”

» “Vendor shall fully comply with all pertinent federal, state and local laws, including but not limited to, wage and hour laws and required deductions including social security, unemployment, worker’s compensation insurance, other applicable taxes and disability insurance.”

» “Vendor shall make all personnel decisions based on fair and reasonable criteria and shall not discriminate based on race, creed, color, national origin, gender or sexual orientation.”

» “Vendor agrees to keep accurate, separate books and records of accounts in accordance with generally accepted accounting standards. These books and records shall, without limitation, show all income and commissions payable pertaining to this specific vending contract.”

» “Client may inspect all records and supporting documentation kept by Vendor relating to the management and operation of the vending contract, including, without limitation, checks, bills, vouchers, statements, cash receipts, contracts, and correspondence.”

» “Client agrees that the intended result of this Agreement is that Vendor will provide quality services and products to client’s employees and guests. Client acknowledges that in order to accomplish this objective, Vendor will need the support and cooperation of its professional and administrative staff and agrees to use its best efforts to provide such support.”

» “Vendor shall maintain standards of sanitation of equipment and supporting operations to the complete satisfaction of the Client. Vendor shall permit inspection of its operation and equipment at any time by the Client to determine that standards of quality and cleanliness are being met.”

» “Vendor agrees to perform the services specified under this Agreement with the standard of care, skills, and diligence normally provided by a fully proficient, professional organization. Vendor further agrees that, at all times, the employees furnishing or performing any of the services specified under this contract shall do so in a proper, professional, and dignified manner.”

» “Vendor will conduct an annual customer satisfaction survey. Results of the survey and subsequent action plan details will be shared with the Client in quarterly quality assurance meetings.”

These suggested clauses can be modified. The important point is to have locations under contract to clarify the expectations between the service provider and the customer. Contracts can make life easier for both parties.

MANUAL FEEDING CONTRACTS
AT A GLANCE

All vending/non-commercial foodservice contracts are derivatives of one of
these types:

1. Profit and Loss: Under this agreement, the contractor pays all costs, including commissions, if applicable, and retains any profit or bears all losses. The contractor is at risk and generally has little direct control over selling prices, hours of service, product categories, or points of service.

2. Management Fee: Under this type of contract, the contractor bears no risk of loss and is guaranteed a fee in a specified dollar amount or a percentage of sales, whichever the greater. Any excess profit remaining, after the contractor’s fees, is returned to the client.

3. Profit Limitation: This is a P&L agreement; the contractor assumes full risk of loss. Furthermore, the contractor agrees to limit profitability and pay all, or a percentage split, of the excess profit to the client. Under this type of an agreement the client may show some interest in maintaining profitability, as a certain profit floor must be reached before any commissions are shared.

4. Fee If Earned: This is a management fee contract which stipulates that the contractor must earn his fee if he is to receive it. The contractor risks losing the fee entirely, or in part, if they do not attain budget. The payment of the fee to the contractor is contingent upon the attainment of a mutually agreed upon budgeted profit or loss. All excess profits are returned to the client and all operating losses are absorbed by the client. The contractor has a clear incentive to manage the vending/foodservice operation creatively and efficiently.


SUGGESTED SHORT FORM CONTRACT

The following short form contract between small locations and vendors is widely used:

“Client grants Vendor the sole and exclusive right to place and operate vending at the named location. Vendor agrees to provide all maintenance and repairs to the installed equipment, excluding vandalism. Prices are subject to change when wholesale cost and or tax increases deem it necessary. Vendor agrees to pay for all required permits, licenses, and sales tax.”

“The term of this contract shall commence on date of signature and shall continue for a period of 3 years. The terms of this Contract shall automatically be extended for successive 2-year periods thereafter, unless terminated by written notice of either party. Such notice is to be given 60 days prior to the expiration of the term then in place.”

“This Contract may be terminated due to service deficiencies or lack of profitability. Notice of deficiency will be given to the Vendor in writing and a 60-day period to correct any such service deficiencies. If these deficiencies are not corrected or appropriate steps taken leading thereto within this period, a 30-day written notice of termination, sent via certified mail, may be given to the Vendor by the Client. This Agreement is assignable by either party without notice.”


Tom Britten is an analyst, intermediary and consultant to the vending trade with more than 30 years industry experience. He can be reached at 813-469-5437 or via email: tombritten@msn.com.

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