Many of our business clients, including manufacturers, are looking ahead and strategizing for a potential economic downturn. If the economy declines, there are a number of things businesses can do to protect themselves as a part of their contracts and operating agreements. The following five strategies will strengthen contracts and help provide some certainty if we are headed for a recession, and these are good strategies to think about regardless of economic conditions.
- Require a Down Payment
- This provides extra protection in any agreement.
- The down payment should be enough to cover all material costs plus direct labor.
- You do not want to be a bank for customers.
- Build an Option to Reprice in Extenuating Circumstances
- Outline reasonable conditions and circumstances in your contract that allow a price adjustment.
- The goal is to provide flexibility so that your firm does not engage in unprofitable work given extreme and shifting economic circumstances.
- Do not attach repricing clauses to a timeline.
- Outline reasonable conditions and circumstances in your contract that allow a price adjustment.
- Include Price Adjustment Terms for Low-Margin Businesses
- Low-margin, high-volume business is especially critical to monitor as even one supplier or raw natural/material can flip a category of business from profitable to unprofitable.
- This is especially true for distributors whose particular value add relates to logistics only.
- Review Payment Terms
- Resist any payment terms beyond 90 days.
- Although some large firms are stretching payable terms to 120 days and beyond, this is unreasonable for smaller businesses.
- Build in repossession terms, particularly if your customer relationship involves leased equipment.
- Provide incentives for early payment.
- Avoid factoring receivables, if at all possible.
- Resist any payment terms beyond 90 days.
- Consider the Payables Strategy
- Contact suppliers early if you know you will not be able to honor a payment deadline.
- Suppliers are usually very understanding and will work with you under most circumstances.
- Always ask for and understand early payment discounts.
- Contact suppliers early if you know you will not be able to honor a payment deadline.
For some additional tips to help prepare for a possible recession, please click here. Please reach out to Jim Seifert and our Manufacturing Practice Group. We would be glad to review and audit your contracts and help you implement a strategy to mitigate the issues that come with a potential economic downturn.
Related Attorneys
