1. Period/term. Fixed, rolling with notice, or a combination. Are you happy if the other party puts in an option to extend for a further period without your say so? Or that they could terminate early?
2. A supplier should have a limitation of liability clause, to minimise the categories (e.g. loss of profits, loss of business, loss of goodwill) or amount (per incident, per year or in entirety).
3. Frequency and mechanism for price changes must be clearly set out. An agreement to decide on these later is unenforceable and the supplier could be stuck with the original prices for the whole duration of the contract.  For example, it is a good idea to include the right to discontinue certain goods/services if no review is agreed by a certain date.
4. Force majeure clause. Without this, a supplier is obligated to continue the supply despite difficulties outside of his/her control, whatever the cost.
5. Specify the levels of service to be supplied. A customer with audit rights over the supplier’s performance data is in a powerful position.
6. Review meetings. Insist on these and use them to record shortcomings and put these right. One day, as a customer, you may want to get out of the contract by relying on a long list of minor breaches, which together, add up to a material breach.
7. The customer should insist on an interest on late payment clause, providing for a reasonable rate of interest if it pays late (the supplier won’t necessarily demand the interest). Without it, the Late Payment of Commercial Debts Act entitles the supplier to 8% over base rate.
8. A change of control clause will give you the right to terminate the contract early if the other party gets taken over. Would you want to be locked into supplying/buying from a company now owned by your competitor or now a separate entity from its wealthy parent group?
9. It is sensible to limit the usual right for the other party to assign the contract to anyone it wants to.
10. Provide a dispute resolution procedure, particularly if you are sensitive to bad publicity. Insisting on negotiations through a mediation and/or an arbitration procedure will keep your dispute out of the public gaze.

All forms of leasing are basically rental agreements giving you (the lessee) the right to use an asset owned by the lessor (finance company) for a specific period of time in return for regular payments (rental payments).

You can lease almost anything, from equipment valued at a few thousand pounds to assets worth millions. Leasing contracts are flexible and can be tailored to your needs.

Types of Financial Lease

• Direct Lease : You identify the asset (and negotiate the price) and arrange for the leasing company to buy it from the manufacturer (if new) or the previous owner (if used) to rent it to you.
• Sale-and-leaseback (also called purchase leaseback) :You sell an asset you already own to the leasing company for fair market value or book written down value (whichever is less) and then lease it back.

In both cases, the lessor owns the asset , not you, and rents it to you. As with any other rental agreement, you return the asset at the end of the lease to the lessor.  Some leases grant you an end-of-lease option to renew the lease at a minimal cost (secondary period) or to sell the asset to a third party as agent of the lessor.

Often equipment manufacturers themselves act as lessors or have an affiliated leasing company. This allows them to more easily help their customers finance transactions. The other two groups of lessors are banks and independent leasing companies.

Types of Asset Finance

There are three major types of leasing: finance leasing, operating leasing and contract hire.  Although strictly speaking not a type of leasing, there is also hire purchase:

• Finance Leasing (Full Payout Lease) : You effectively acquire all financial benefits and risks without actually acquiring legal title. The leasing rate is computed to collect the full value of the asset (plus finance charges) during the contract period. At the end of the lease, the asset is sold to a third party and you can receive a share of the sale proceeds (if the lease is not being extended). Generally, you will not be able to become the owner of the asset at any time – unless a private arrangement is made with the third party. However, you usually have the option to extend your lease and as you will have paid for almost the full value during your initial lease period, the rental payments for subsequent periods will be minimal (sometimes referred to as “peppercorn rent”).
• Operating Lease : Often with a shorter time frame than financial leasing (always significantly shorter than the working life of the asset), operating leasing is more like a regular rental. The lessor expects to be able to either sell the asset in the second-hand market or to lease it again and will therefore not need to recover the total asset value through lease payments. There may be an option to extend the leasing period at the end (this negotiation can only take place at the end of the initial rental period). As with finance leases, you will not be able to become owner of the asset at any time but, contrary to financial leases, you will not share in the sale proceeds.
• Contract Hire : A form of operating lease (often used with cars and other vehicles) that includes a number of additional services such as maintenance, management or replacement if asset is in repair.
• Hire Purchase : This is an agreement for the hiring of an asset with an option to purchase. The legal title will pass to you when all payments have been made. The term of a hire purchase must be significantly shorter than the working life of the asset. You are able to claim capital allowances as if you had purchased the asset outright, gaining immediate use of it. Hire Purchase agreements are typically written for domestic users, not so much for business users.

End of Lease Options
At the end of the lease term, you have various options . Lease contracts can stipulate that you:

• return the asset
• have the right to act as an agent to sell the asset to an independent third party; and/or

• can renew the contract or enter into secondary periods.

Choosing the Right Type of Finance

All types of financing offer different advantages and it is important that you assess your circumstances and needs before committing to a specific finance contract.

1. Do you want to own the asset straight away? An outright purchase (cash or loan/overdraft) might be appropriate.
2. Do you want to own the asset at some point in time and want to take advantage of instalment payments? Hire purchase might be the best option.
3. If you do not want to own the asset at all but require it for most of its useful life, then consider a financial lease.
4. If you require the asset for a period of time significantly shorter than the useful life of it, consider an operating lease.
5. Advantages
   Better Cash Flow : Leasing gives you access to the asset with minimal up-front payments and spreads the cost over time. You to pay for the asset with the income it generates while minimising the drain on your working capital.
6. No debt : An operating lease preserves your credit options and does not influence your credit limit as it is generally not classified as debt but as expense (note that this advantage does not apply to finance leases).
7. Maximise Financial Leverage : Your lease can often finance everything related to the purchase and installation of the asset and may free up cash flow to pay for items such as training.
8. Simplified cash flow management : Lease payments are usually flat, making cash management more predictable and easier than with a variable rate loan. The fixed interest rate of a lease also helps if interest rates rise.
9. Tax advantage : Operating lease payments are generally tax deductible just like depreciation charges but are made with pre-tax money. Cash purchases, in contrast, are made with after-tax money. Hire purchase agreements allow the lessee to claim capital allowances.
10. Flexible time frames : Leasing contracts can be structured to fit your requirements. Use an asset as long as you need it without owning it forever.
11. Hedge against obsolescence : Depending on your end-of-lease option, just return the asset to the lessor. You will not have the hassle of selling the used asset or run the risks related to residual value and (technical) obsolescence.
12. Additional advantages :Some leases offer additional advantages such as cancellation options or asset maintenance.
    

Disadvantages

1. More expensive : A finance lease is usually more expensive than an outright cash purchase as the payments include finance charges. However, leasing may cost less than other forms of financing. Also consider the tax advantages when making this calculation.
2. Additional Guarantees : Depending on the credit rating of your company, the lessor might require additional guarantees. These may be provided by you, your partners or your bank and could affect your personal credit rating or your standing with your bank.
3. Fixed Term : It may be impossible, or at least costly, to terminate a leasing contract early.
4. Fixed Interest Rates : Interest rates are usually fixed throughout the lease which may prove a disadvantage in times of falling interest rates.

Things to Watch out for

1. Return of Asset Conditions : If you choose to return the asset at the end of your lease, the condition in which and the place where it must be returned are important aspects to consider carefully.
2. Notice Period : If your lease includes the option to renew take note of any time periods in which to give notice in case you do not want to renew the contract. Some leasing companies will automatically renew the contract if you fail to give notice.
3. Purchase Rights : If negotiating the right to purchase the asset at the end of your lease, a predetermined fixed price offers more value as the ‘fair market value’, which theoretically is always available to you.
4. Maintenance Responsibility : Clarify which service and maintenance programs are included in the lease. If you are responsible for service and maintenance, make sure you do not have to provide an unreasonably high degree of it.

Glossary

Direct lease : you identify the asset (and negotiate the price) and arrange for the leasing company to buy it from the manufacturer (if new) or the previous owner (if used) to rent it to you. (see also sale-and-leaseback)

Economic life (useful life) : the period of time during which an asset has economic value and is usable.

Fair Market Value : price at which an asset is sold and bought in the open market.

Lease : a lease is a contract in which the lessor purchases the asset selected by you and conveys the use of an asset to you for a specific period of time at a predetermined rate.

Lease Rate : the periodic rental payment to the lessor for the use of the asset. The lease rate is primarily determined by the total cost of the asset, the duration of the lease and the interest rate level.

Lessee : the lessee is the user of the asset being leased, i.e. you.

Lessor : the lessor is the party who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals, i.e. the leasing company.

Master lease : a contractual arrangement which allows you to lease other assets under the same basic terms and conditions without negotiating a new contract.

Purchase option : a provision by which you have the right to purchase the asset at the end of the lease term, either at a predetermined amount or its fair market value.

Residual value : the resale value of the asset at the end of the lease.

Sale-and-leaseback (also called purchase leaseback): you sell an asset you already own to the leasing company for fair market value or book written down value (whichever is less) and then lease it back (see also direct lease).

Here are a few things to watch for – really not rocket science but you’d be surprised…

1. Read the Entire Document before Signing :  After signing the document, it is assumed that you have read, understood, and agreed  to all of the terms.  If the other party states that a portion or paragraph of the  contract does not apply to you, delete or cross out that section.  You and the other party should initial next to the correction.
2. Ask Questions : If you are unsure about ANYTHING in the contract, or do not fully understand the document, ask the other party about these areas.  Or STOP and take legal advice.
3. “Standard Terms ” : Beware when the other party simply  indicates that this is simply a “standard document” and you should not worry about  reading it.  Be aware that few legal documents are “standard.”  Contract terms vary and it is a good  idea to have someone else read through the document.
4. Take Time to Consider the Full Agreement : Do not be pressured into signing an agreement before you are ready.  Allow yourself to  take time to consider your options, priorities, or the contract itself if you need it.   Take your decision to sign seriously, as you will be making a large  commitment and investment.  Your signature indicates your immediate  commitment to the terms of the contract.  Take time to make an educated decision.

A service level agreement defines the service they must provide, the level of service to be delivered and sets out responsibilities and priorities.

It is important that you are involved in drawing up the agreement together with the supplier.

Key clauses in this agreement include:

• The service being provided
• Standards of service
• Delivery time scales
• Responsibilities of each party
• Monitoring and reporting of the service
• Legal and regulatory compliance
• Payment terms
• Dispute resolution
• Confidentiality and non-disclosure provisions
• Termination of the agreement
• Building in formal performance reviews is the key to success. If your supplier fails to meet agreed service levels, your agreement should provide for compensation. It is important to identify the most critical components of the service and apply the strictest penalties to these.

As the needs of your business change, you may require different performance criteria and your service level agreement should provide for this allowing for regular discussion and renegotiation. If you use technology then service levels need to be updated to take into account improved technology.

Due to the nature of the close working relationship you will have with such an important supplier your service level agreement needs to be clear and fair. That way your relationship will flourish and grow to the benefit of both parties.

Remember: A contract or agreement is primarily intended to allocate the different risks and rewards in a fair manner.

The main advantages of a Joint Venture are independence, cheapness and simplicity as compared to a partnership agreement.

There are great benefits to entering into a joint venture including:

• Access to new markets and distribution networks
• Increased capacity and more resources
• Sharing of risks with your partner
• Access to specialised staff and technology

Success in a joint venture depends on thorough research and analysis of aims and objectives. These should then be incorporated into a written joint venture agreement. Trust forms a key element of successful joint ventures and agreeing exact terms when you set up your joint venture will help to minimise these risks and give the confidence to enter fully into your relationship without reservation.

Key clauses in a Joint Venture Agreement include:

• The initial and future contributions of the joint venture partners
• The structure of the joint venture, eg whether it will be a separate business in its own right or on a contract basis
• Management and control, eg respective responsibilities and processes to be followed
• How liabilities, profits and losses are shared
• Resolution of disputes between the partners
• Sale and transfer of partnership status
• Ending the joint venture

There are two main types of joint venture. The most common is a contractual joint venture, where you can establish an agreement to co-operate, without setting up a separate business. For larger or more complex projects an incorporated joint venture, where you set up a separate business in order to carry out a particular activity or project may be more appropriate.

There is no contract of sale between the supplier and the ultimate purchaser of the goods.

Put simply, the distributor will buy the goods from the supplier and sell them on to its customer.

Key clauses in this agreement include:

• A detailed breakdown of the duties and responsibilities of both parties
• The geographic region in which the Distributor will operate
• Whether the Distributor will have exclusive or non-exclusive rights
• The rate, method and timing of payments
• Any non-compete agreement
• Protection of trade secrets and confidential information
• Supply of goods and minimum stock levels
• The duration of the agreement, termination and how breaches of the agreement are handled
• The principal’s option to buy-back products on termination of the agreement
• Although there should be terms and conditions of sale in place between the principal and distributor, it is less important for the supplier to be concerned with the terms on which the distributor sells on to his customer as it is the distributor who will be liable to the customer, not the supplier.

For anyone setting up a distribution network a distribution agreement is key to its success. It helps to promote trust and good will between both parties and gives them the confidence to maximise profits.

The purpose of an agency agreement is to set out the terms and conditions of the relationship between the business which wants to sell stuff (the Principal) and the intermediary who agrees to sell it on their behalf (the Agent). When a sale is made by the Agent, the law deems that a contract is formed between the Principal and the end customer.

Not to be confused with?

• A distribution agreement, in which a supplier sells goods to a distributor who then, as a separate transaction, sells the goods to his or her customer. There is no contract of sale between the supplier and the ultimate purchaser of the goods.
• A franchise agreement

• Subsidiaries or branches

A word of caution…

If you are planning on using a business intermediary, you would be wise to seek professional legal guidance. Not only does the law attach special legal meaning to agency relationships, but it’s possible for parties to find that they have entered into such a relationship without being aware of it.

Key clauses in an agency agreement include:

• A detailed breakdown of the duties and responsibilities of both parties
• The geographic region in which the Agent will operate
• Whether the Agent will have exclusive or non-exclusive rights
• The rate, method and timing of payments
• Any non-compete agreement
• Protection of trade secrets and confidential information
• Level of authority to make commitments on behalf on of each other
• The duration of the agreement, termination and how breaches of the agreement are handled

It is important that the Principal and Agent have clear written commercial terms agreed so that both parties know what to expect from their deal. Many relationships between suppliers (Principals) and Agents have gone wrong because they do not have this simple document in place. They have often relied on orally agreed terms or negotiations which have proved costly in terms of lost sales, commission and subsequent legal action to define and enforce the commercial terms. An agency agreement will make your relationship clear, giving both sides confidence in making the most of the opportunity.

European Directive and UK Commercial Agents Regulations 1993

Agency law is one of the areas where European legislation has had significant impact, and most of it is in favour of the Agent. An EC Directive was introduced to harmonise the law relating to commercial agents across Europe. In the UK, the EC Directive was implemented by the Commercial Agents Regulations 1993. They contain important provisions, which the Principal or Agent ignores at their peril, including:

• The right of the agent to have a written agreement
• The entitlement of the agent to a reasonable commission in the absence of any fee or percentage agreed in advance
• When commission is payable and on what transactions
• Minimum periods for notice of termination of indefinite agency agreements
• The right of the agent to either “compensation” or an “indemnity” on termination

The most important change which resulted from the Directive and the Regulations was the right of the agent to claim compensation or indemnity on termination of the agreement. Many Principals have been caught out here and many Agents have been unaware of their rights.

As a Principal it is important to structure your agency agreement to take into consideration the Commercial Agents Regulations 1993 or any dispute could be very costly in terms of compensation.

Franchisees

If you are a franchisee buying a franchise is a significant investment and you should not sign any agreement, or pay any fees or deposit, until you have taken legal advice from a solicitor.

The simplest way to begin is to obtain a specimen contract for them to review.

A typical franchise agreement will cover six main areas:

• Term
  The term of your franchise agreement covers how long the franchise lasts, how it is renewed and on what terms. It also looks at how your franchise can be terminated early. There may well be performance criteria to be met.
• Territory
  This is the geographic area which your franchise covers. Whether or not you have exclusive rights and how the borders of franchise territories are covered.
• Fees
  These come in many forms and are usually broken down into an initial fee, royalties on sales and a regular management fee. Depending on the franchise you may also have other costs to pay. Joint marketing is a common one.
• Support
  The amount of help you get from your franchisor is often critical for success both when you start your business and on a continuing basis, as you progress.
• Restrictions
  Most franchisees will place restrictions on what you are and are not allowed to do. They often stipulate how you should run your business. Minimum stock and staffing levels are common, as are where you purchase your stock and how much you can sell you product or service for.
• Exit
  The framework in which you can sell your business and what happens if you can’t continue in business for some reason – perhaps due to ill health or lack of funds.
  Other items which need to be considered include how “goodwill” is treated, insurance cover, and intellectual property rights.

We are often approached by new clients who have come to us late in the day in severe difficulties with their franchisor in all the above areas. If we had seen the franchise agreement in advance then most of these difficulties could have been averted. If the franchisor is a member of the British Franchise Association then the contract will be more straightforward but even here there are a number of areas where a new franchisor can be tripped up.

Franchisors

Growing your business using the franchise method is an exciting and proven method to accelerate your business. Your franchise agreement is probably your most valuable business document which will determine how enforceable your rights are against your network of franchisees.

Key to your success is having a sound, clear and fair franchise agreement. From your perspective a franchise agreement should encourage good franchisees whilst providing positive, proactive remedies for those who are under performing or causing difficulties for you or other franchisees.

Your franchise agreement needs to allow your franchisees the right amount of freedom so that they feel the business is their own whilst protecting you from fraud, misconduct and the stealing of your intellectual property.

Important things like providing the right amount of support for your franchisees is vital but you must also make sure that this operation does not cost you too dearly in terms of resources and money.

Getting your agreement wrong can mean that rogue franchisees may ruin your franchise brand and reputation or even copy your idea and start up in competition.

A well drafted franchise agreement will give potential franchisees the courage to sign up with you and perform to the best of their abilities. A poor franchise agreement could deter new applicants or leave you unable to get rid of a bad one causing you and other franchisees difficulties and problems.

Time and time again we come across companies who have entered into talks with another business and shared information only for negotiations to break down or The business use the information to their own advantage and the lack of a confidentiality agreement has had a catastrophic effect on the company divulging information without the right protection and remedy in law.

A confidentiality agreement is a legal agreement between you and another party in which you agree to divulge information (trade secrets) to them and they agree not to disclose that information to anyone else.

Generally, information qualifies as a trade secret or confidential when, it is not known in the public domain or, is only valuable as long as it remains secret or confidential.

Having an agreement in place allows you to approach and disclose information to potential partners, suppliers, customers and consultants knowing that they are legally required not to pass on that information. Most documents of this type follow a standard format but must be tailored to fit your requirements if they are to be of any real benefit.

You can use confidentiality agreements to protect you under many circumstances. Here are just a few to give you an idea:

• Intellectual property, trade secrets, eg a mathematical or chemical formula, programme or process, technical drawings and designs, algorithms
• Business plans
• Customer and prospect lists
• Commercial or trading information
• Formalise a relationship, eg between an employer and employee
• Employees are under a duty not to divulge trade secrets however, former and current employees are responsible for many breaches in confidentiality. Therefore it is safest to have a document which states exactly what is confidential and provides for when an employee leaves.

This document will enable you to undertake all sorts of exciting business activities with confidence including:

• Collaborating with others in the development of a product or service
• Working with other companies to sell and buy from each other
• Exploring joint ventures to pool resources and skills to develop a product or service which neither partner would be able to do alone
• Employing new staff and saying goodbye to old ones whilst ensuring there is a way to prevent them from divulging confidential information
• Putting an embargo on journalists in order that you can give information to the press and control when they are made public

A well structured and written document will make for a smooth relationship with your partner and deter anyone from breaching. If your partner breaches the contract, you can take them to court for damages. If you suspect that your business partner may be about to breach your confidentiality agreement, you can get an injunction to prevent this from happening.

The biggest problem in drawing up a confidentiality agreement is determining exactly what is and what isn’t covered by the agreement. Naturally you will want to cover the broadest spectrum of information whilst your partner will try to make the terms as narrow as possible.

Should you have to go to court then it is important that the definitions and exceptions in your document are appropriate for the type of trade secrets you are sharing. If your confidentiality agreement is flawed you may not be protected should it be tested in a court of law.