They should also check the financial health of their
suppliers to ensure that they can continue to provide services and
equipment needed to carry on trading, said Iain Monaghan, a partner
with Pinsent Masons, the law firm behind OUT-LAW.COM.
"There are things that you can check, and first among those is
probably looking at exactly who your customers are and how their
credit-worthiness has been affected by the recent changes," said
Monaghan. "If there are reasons for concern, the next thing is to
look hard at the agreements you have with them."
Over the past 12 months many businesses have found it
increasingly difficult to gain access to cash and capital as banks
refuse to lend – even to other banks. In the past 10 days some
financial institutions have faced plunging share prices and have
been unable to secure enough capital to continue trading.
US investment bank Lehman Brothers collapsed, while Halifax Bank
of Scotland will be bought in an emergency deal by Lloyds TSB.
Merrill Lynch was bought in a similarly hastily-arranged deal with
Bank of America, while the world's biggest insurer, AIG, has been
the subject of a $85 billion US government bale-out.
Surviving 2008 unscathed does not just mean that you need to
look after your own financial position, though. You need to look at
the position of your significant customers and suppliers, according
to Monaghan. "It is not just about whether you have Lehman Brothers
as a customer – do you have a contract with someone who depends
heavily on their trade with Lehman Brothers?" he said.
Once you have looked at who you are doing business with you need
to remind yourself of the terms on which you are doing business
with them. "Termination for insolvency is the extreme example, but
contracts may also provide for additional security, or termination,
in the event of financial distress," he said.
Consolidation may also provide options. "If you're a customer it
may be that your contract allows you to terminate a contract if
there is a change of control of the supplier," said Monaghan.
"However, in a difficult market, you need to consider carefully
whether you really need the services being supplied under the
contract. While change of control clauses can often provide an
opening for renegotiation, they are a dangerous weapon if
consolidation has removed all credible alternatives to your current
supplier."
Normal good business practice becomes even more important in
difficult times. "You should try to make sure that you are not
overly reliant on a small number of customers and that you follow
very closely when bills are paid and make sure you operate tight
credit control," he said.
Monaghan also said that companies should put themselves in their
clients' shoes and realise that cost savings will be expected.
"I think suppliers have to assume that customers are going to
look for ways of saving money," he said. "If you can present them
with ways of cutting costs, getting savings, you have a chance of
pre-empting the customer's demands and gaining some control over
the direction of the discussion. At the least you may persuade them
not to consider more drastic options, such as changing to a
lower-priced rival."
Five tips for businesses
Monaghan and other specialists at Pinsent Masons advise that
companies should:
- Ensure you have robust agreements in place with important
customers and suppliers. Review your contracts with these customers
and suppliers to ensure they are clear about each party's
obligations and liabilities. Consider whether contractual terms can
be improved in relation to financial distress.
- Check contract compliance – make sure that your paperwork is in
order for when the other party starts to look for ways to get out
of the contract.
- Don't rely on an understanding or gentleman's agreement. If an
issue is important to your business, make sure you have a proper
contract.
- Ensure that your contract managers monitor both your and the
other party's contractual performance carefully. Your customers or
suppliers may be slow to pay – or may try to wriggle out of
commitments.
- Plan for the worst. If your business is reliant on suppliers,
you need realistic contingency plans. The potential cost, even to
multi-national businesses, of supplier default can extend beyond
immediate and dramatic financial losses to potential damage to
reputation, brand and wasted management time.
