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There are three types of contracts that are incredibly valuable to your business when you go to sell. These three types of contracts are contracts with your clients or customers, contracts with your suppliers, and contracts with your employees. Let's take each one of them and talk about how valuable each one of them can be.
The first type of contract is a contract with a client or a customer. So if you have a contract with a client for a period of time, you can be sure that you're going to receive money as long as you deliver on the terms of that contract. Now, exclusive contracts are even more valuable.
If you're the exclusive service provider of a particular service, or you're the exclusive product provider of a particular product, that customer has to buy from you. Even if it's non-exclusive, it provides predictability in the revenue that you're going to receive. My preference for you would be longer term contracts, three, five-year contracts.
Why? Because that makes three and five-year revenue predictable. And remember, people who are buying your business are buying future profit. If you have predictable revenue and you keep your expenses predictable, you have predictable profit.
And that's what people are buying from you. Any customer that you can lock up with a contract, whether it's exclusive or non-exclusive, is valuable. Exclusive contracts are even more valuable.
So look to the people who buy from you with frequency and see if you can create a guaranteed minimum number of pieces or minimum quantity of a service that they're going to buy from you and contract for that product or service to be delivered over three or five years. It makes your business way, way more valuable. The second type of contract is an exclusive supplier contract.
So if you're the only person that can get a certain type of raw material or a certain type of service delivered so that you can provide a service based on what you're getting delivered to your clients, if you're the only person that can get this, you're the exclusive customer of a supplier, you can lock out your competition. I'll give you an example. I worked in the corporate housing industry.
I started Marriott's Execustay brand in Manhattan and we would sublease apartments to our clients. We would take what's called a master lease from a developer. We would negotiate that we would be the exclusive corporate housing provider in that building so our competitors couldn't operate in that building.
So if we had the only residential building on 55th Street and 7th Avenue in New York City in the theater district, if that was the only building there and we were the exclusive corporate housing provider, anybody who worked in the theater community who needed corporate housing would have to come to us. That exclusive supplier contract from the developer who owned that building to us was a huge competitive advantage for us. It allowed us to corner the market.
You want to lock up as many of your suppliers on exclusive agreements as possible so that you can lock out your competitors. The third agreement that we should talk about is customer agreements with your employees. Employment agreements.
Now there are employment agreements that lock up your employees so that they will only work for you. And while they're working for you, it's critical that you have these agreements with them. And then there are agreements where you will pay them if they leave you to not join the competition.
I'm not giving you legal advice here. I'm not qualified to do that. So always check with your lawyer.
But whenever you can, if you can negotiate with your employees that they will work exclusively for you and for a period of time after they leave you, they will not work with your competitors, regardless of whether you have to pay them for that or not, you're going to be more valuable. Your business is going to be more valuable than businesses that don't have those types of agreements. Anytime you have a chance to lock up your employees with a long-term agreement, it's going to be valuable.
Now, here's the thing. When you're in the process of negotiating the sale of your business, you want to keep the information confidential because you don't want to spook your employees. This is a period of time when you should be negotiating with them to be bound to the business because you want them to stay through the transition of the ownership.
You never make an employee's contract contingent upon who the owner of the business is. All of those contracts, in fact, all three of these contracts need to be transferable from one owner of the business to the next. These contracts are directly with the business and the other party so that if you sell the business, the contracts move with the business.
The reason these types of deals, these types of agreements, make your business more valuable is because of predictability. People who are buying a business, as we've said dozens of times on the show here, they're buying a business because they're buying future profit. They want that future profit to be as predictable as possible.
In order to predict future profit, you can lock in customers, you can lock in suppliers, and you can lock in employees. Anything that makes your business more predictable makes your business more valuable. That's a great rule of thumb.
Predictability equals more value when you go to sell your business. This is the Inside BS Show. My name is Dave Lorenzo.
I will see you back here tomorrow where we will cover another great tip on how you can extract the most value from your business when you're ready to sell.