Learn About Sales Contracts and Negotiation
Learning Objectives
After completing this unit, you’ll be able to:
- Describe what a sales contract is and when you should use it.
- Be aware of your role in a negotiation.
- Prepare for smooth contract execution.
What Is a Sales Contract?
A sales contract is an agreement between a buyer and a seller. The seller agrees to deliver a product or service for a set price that the buyer agrees to pay. The contract outlines the transaction terms and also specifies the details of the products or services being offered. It’s important that the document is kept for legal and record-keeping purposes.
According to the Uniform Commercial Code (UCC), which governs all commercial transactions in the United States, a written contract must include:
- All parties involved in the transaction
- What is being sold
- Special terms to the contract
- The contract value
- The payment method
The UCC also specifies that any sale that is worth more than $500 should be accompanied by a sales contract in order for it to be enforceable. Sales contracts often include the following items.
- Sales agreements: Sales agreements define what is being purchased and the terms of the sale.
- Order forms: These are forms that buyers fill out with their specific needs and then return to the seller.
- Change order forms: These forms allow a buyer to make changes to an existing order. These additions to existing contracts will adjust the terms and conditions.
- Master service agreements: MSAs are meant for long-term agreements, and outlines the terms and conditions for all future agreements.
- Statement of work: SOWs are often used for contracted work and services. They cover what the contractor provides, and includes deadlines, payment details, and requirements for the relationship.
- Terms of service: These are a collection of clauses that define how users interact with offerings such as digital products, websites, mobile apps, software, or online stores.
- Renewal and upsell agreements: A renewal is a contract where a customer chooses to renew a previous contract. An upsell contract is the same as a renewal but also includes additional products or services.
While you won’t need all of these in the same contract, it’s good to be familiar with them to determine what type of contract works best for your business goals. Now that you know a bit more about contracts, keep reading to learn more about how to negotiate contracts.
Negotiating Sales Contracts
In negotiation, the process of editing a contract until it’s acceptable to both parties is called redlining. It’s possible to go through several versions of a contract before signing, so prepare a plan of action to stay on track.
First, prepare internally. Check if there is a negotiation threshold applicable to your deal. If there is and you still feel you need legal support, seek appropriate approvals. Make sure you understand the customer’s process and timelines. It’s also important to align with your legal contact to agree on an appropriate negotiation strategy from the outset. Check if deal support teams align to your team. If so, plan to collaborate on resource availability, call timing, and document turnaround.
You may also want to consider these questions when drafting your plan of action.
- How will you engage with the customer’s legal team? Some may benefit from an introductory legal presentation, where others may prefer to read FAQs.
- How and when will you position possible concessions for maximum impact?
- Which team is best to lead on specific issues?
- How will you present a unified front to the customer?
Wherever possible, streamline your internal communications as they’ll be the single source of truth that can be referred to by all stakeholders.
It’s also important to prepare your customer. Work with your legal team to provide a summary letter and FAQs to accompany your contract to define contract terms for your customer before their legal team reviews the contract. Act as the facilitator at any contract negotiation meetings, and keep track of action items and open issues.
Your legal team can provide guidance on how and when to seek approval for contract concessions. Before seeking approval for concessions, have a kickoff call with the customer to explain the contract. Generally, the number of contract changes significantly decreases when a customer understands the terms and why they’re included.
A kickoff call can also assure the customer that their concerns are met by the contract and that you’ve offered a balanced and appropriate set of terms. Once the contract’s redline is agreed on, all that remains is for the contract to be signed by duly authorized representatives of both companies. Be sure you understand both the customer’s and your own signature processes in order to control the timing and avoid risks that can affect the closing plan.
For example, some customers may have special approval and signature rules like wet signatures that can impact how much time is needed for the final negotiations and deal closing. Build this into the deal timeline to avoid surprises and successfully close your deals.
Finally, it’s important to strive for a productive team atmosphere. Remember that you’re working together with your legal department on these contracts. Being transparent, respectful, and helpful will take you far.