Business Owner’s Toolkit – Negotiating Payment Terms
Work hard to get favorable contract terms that will protect business cash flow as much as possible.
Every contract is a potential cash flow killer at Cougar Turbine Supply LP in Conroe, Texas. The company buys, refurbishes, and resells used Solar turbines and engines at prices ranging from $300,000 to $1 million or more. One overhaul can take four months. If the turbine seller won’t accept extended terms for the purchase price, then Cougar must get part of or the entire resale price up front from the buyer, says President Allen Shearer. “It’s devastating to our cash flow to have a piece of equipment at those prices sitting in our shop for four months.”
Allen and his two partners must carefully negotiate every contract to buy an engine or turbine or to find, overhaul, and sell a specific piece of equipment for Cougar Turbine Supply to make the most of its capital and avoid costly borrowing.
Cougar’s customers are oil and natural gas companies around the world. Only a handful of competitors have the financial resources and the technical expertise to buy and overhaul the expensive machinery that Cougar’s customers need.
“If we have extra cash, we might buy surplus equipment without having an immediate buyer for it because we can get equipment much cheaper if it’s not needed,” Allen says. “A turbine might cost me $75,000. But as soon as the seller knows I have a contract and need the equipment right away, the price might be $300,000.1 get much better terms if they need to sell rather than I need to buy.”
More often, Allen does not buy equipment until he receives an order from an oil or gas company. When Allen gets an order for a specific turbine or engine, he builds into the delivery date the time it will take to overhaul the equipment and perhaps a little time to find the machine, “but the customer needs it so it won’t wait forever for delivery,” he says. Allen negotiates with the customer to pay as much of the contract up front as possible, which is sometimes delicate because the customer is trying to preserve as much of its cash as possible as well.
“It’s tough being a small company with limited capital in this industry,” he says of Cougar, which has 15 employees and 2003 sales in excess of $9 million. “Our competitors are General Electric and other giants. They don’t have the financial constraints to overcome like we do but they have a lot of red tape and can’t make decisions quickly like we can.”
Cougar remains focused on just one product line, rather than many, “which gives us less diversification, but does allow us to be the experts, which benefits our customers,” Allen says. That expertise enables Cougar to manufacture many specialized components used in the overhaul of Solar engines or turbines that customers can’t get anywhere else.
Cougar’s fast growth has been another restriction on the company’s capital. Banks have been nervous that with contracts carrying such large price tags that the company is using its line of credit for operating capital instead of revolving purposes. “Bankers don’t understand rapid growth like ours, and every year when our line of credit comes up for renewal we spend three weeks justifying what we do,” Allen says. “You have to be very careful. It’s hard to pull back on the reins, which entrepreneurs don’t like to do, and not to grow too fast.”
That challenge makes careful negotiation of contract terms with every supplier and customer all the more important for Cougar’s continued financial strength.