Beware Of Interruptions By Important Vendors

Imagine this: You have an important vendor that produces an important product or service for your business, and you come to rely on that vendor to deliver regularly. Your ability to service your customers depends on this vendor, so if there’s an interruption by the vendor, it could not only jeopardize your ability to generate revenue, but potentially create a number of breach of contract disputes with your customers.

This article was written by Larry Donahue and originally published by Law 4 Small Business.

Do you have such a relationship or vendor?

Do you have serious money tied up with such a vendor?

I bet you may have at least one such relationship, and you’re thinking “I trust my vendor” and don’t think I have to worry about interruptions.

What happens, though, if your important vendor was a sole proprietorship or other small company, such that if the main guy (or gal) dies or becomes incapacitated? What would happen then?

This scenario actually happened recently to a caller (not a client, so I’m not divulging any sensitive attorney-client information here).

The caller had such an important vendor, who custom manufactures certain products the caller resells. Their relationship worked for years. The caller had over $30,000 committed to the relationship, in the form of a cash deposit for some large custom products, and then out of nowhere, the vendor died.

The caller knew his important vendor was a “small shop.” What he didn’t realize was, his vendor was basically “the guy.” The business was a sole proprietorship, and when the guy died, the business died with him. The $30,000 deposit? Who knows? The custom-built stuff being manufactured? Sitting on a shelf somewhere.

The caller called us, asking what his options are. The answers are difficult. Who is the guy’s estate? Has it been entered into probate? Can we file a claim or lien on the money and the products?

There are answers here of course, but when you hear an attorney say “difficult,” think potentially costly and worse, potentially time-consuming. It could be months before we’re able to figure out where everything is, and get ahold of the cash. The partly completed custom-built manufactured items are another story for our client. Who can he replace to finish the work? Can he find someone else? Is it worth spending the money to get ahold of, then ship, partially completed items to another manufacturer?

These are all questions you probably don’t want to have to deal with, especially under the gun with your own customer orders to fulfill.

The lesson here is: you owe it to your business to ask some questions and have contingencies in place for circumstances like this. You don’t have to jeopardize the loyalty or relationships you have with your vendors, but you might want to consider creating or running through a checklist similar to the following:

• Is your vendor a sole-proprietorship or a corporate entity (i.e. LLC or Corporation)? If sole-proprietorship, you should request some assurances (and documented processes) on what to do, if something should happen to the main guy (or main gal).
• If you are sending large deposit funds, what happens if the vendor has a catastrophic event (i.e. all the main folks get killed in a freak accident?) You should have some sort of process for this, or the funds should be placed in escrow to be released after specific, definable and provable milestones have been accomplished.
• Do you have a contract in place, with S.M.A.R.T. Goals, that identify key milestones and identifies what happens if those key milestones are not met?
• Does your contract have important provisions for the safety of your business, including confidentiality, trade secret information, intellectual property, non-solicitation, notice, dispute resolution and more?
• Do you have escalation procedures in place?
• Do you have alternative contact information, that is regularly updated?

It’s easy to fall into a sense of complacency when a key vendor relationship has worked for some period of time. The longer the relationship, the greater the chance of complacency. But, ask yourself, “What if?” Don’t get caught like this caller did, which basically put their entire business on ice.