Be Careful Before Signing Your Soft Drink Contract
Did you know that your soft drink contract has terms in it that will still be in effect after the agreement expires? Did you know those terms could cost you millions of dollars?
It’s true. In general, soft drink contracts are constructed to give your soft drink partner maximum leverage and control. The contracts are designed to limit your flexibility, especially after the expiration. The number of onerous terms in your contract is directly related to how much negotiation and diligence you do before you sign.
At BevTrust we call onerous terms “Land Mines”, because most restaurant operators don’t know about them until they step on them. And often, that fateful step is after the contract expires.
There are many land mines to worry about, but in this short article, let us examine one typical example – the “Unbundling” land mine.
What Is Unbundling?
Unbundling refers to the amount of money you will be obligated to pay if you do two things. Those two things are: 1) Take loaned or leased equipment from your soft drink partner, and 2) have a contract that expires prior to the end of the equipment depreciation schedule.
You can find the unbundling clause in the so called “Standard Terms and Conditions” section of your contract. There is nothing “standard” about it. And it is usually written in illegible fine print.
Who Is Subject to Unbundling?
Most operators have loaned or leased equipment. And almost all operators have contracts that expire prior to the end of the depreciation schedule. The depreciation is either 100 months (8.33 years) or 10 years. Most contracts are 3, 5, or 7-year deals.
What Does Unbundling Cost?
The unbundling clause will, at least, obligate you to pay for the unamortized portion of the non-serialized equipment, refurbishment of all of the equipment, removal of the equipment, and the initial installation labor cost. In the unbundling clause, it will not specify what any of these costs are, so you are at the mercy of your soft drink supplier to set those costs arbitrarily. All of this is owed at the expiration or termination of the contract. Generally, it provides leverage for your soft drink supplier to keep you in place.
Why Is It Unreasonable?
Unbundling charges are unreasonable in many ways. Why should you pay to refurbish equipment that your supplier will redeploy in your competitor’s restaurants? Your soft drink supplier has completely built all these costs into their financial analysis of your deal. They don’t count on recovering them. The only purpose of the clause is to limit your flexibility upon termination or expiration. None of the costs are limited or even defined. Should you sign a contract that obligates you to pay for things that have no upper limit? That’s exactly what this clause does.
What Can You Do About It?
1) At very least, define all costs listed in the clause. If you are going to be obligated to pay something, at least define how much it is.
2) Negotiate it out. Just get that clause out of the contract. If you can’t, find another supplier who will be reasonable about it.
3) Own your equipment. If you own your equipment, you are beholden to no one and you can benefit from the depreciation instead of your supplier.
There are so many more of these land mines. Be careful. I
f you need help, BevTrust is here for you.