Once upon a time, agreements seemed easy. Both parties talked about the terms and conditions, shook hands, and that was that. No hidden clauses or seemingly sketchy penalties.
Don't get us wrong. In some instances, that's still the case. However, ever the pessimistic optimists, we're highlighting a few items to look out for when signing a long-term contract.
Keep an eye out for automatic renewals that come with hefty increases
Mark your calendar to alert you or your team 60-90 days prior to the dates of all contract expirations. This gives you a chance to let them know your plans before automatic renewal (and fees) kick in. If you do decide to renew, you can negotiate the automatic price increase.
Spot early pay-off penalties
When signing a contract that involves financing for new capital equipment, review it carefully to see if there is an early payoff penalty should you pay off the equipment quickly. This may not be negotiable when signing the contract, but it is something that every practice owner should be aware of prior to signing the contract.
Evaluate the financing terms of the contract
There several types of financing terms, including these popular ones:
Capital lease/Finance lease. This allows you to make fixed monthly payments and purchase the equipment for a nominal buyout at the end of the lease. The lessee is the owner, controls the equipment, may depreciate it, and maintains the equipment as an asset on their books.
True lease/Operating lease. This is also known as a fair market value lease. The term of the lease is generally not greater than 75 percent of the equipment's anticipated useful life. The present value of the lease payments should not exceed 90 percent of the fair market value of the equipment using the lessee's incremental cost of borrowing. The payments are usually less than finance leases and bank loans
Purchase upon termination (PUT) option. This means that the seller sets a definite residual value at the end of the lease at which you must purchase the item. It's also called a closed-end lease. When the residual value of the item is higher at the end (the mandatory purchase price), the payments are lower during the term, because there is still a higher value for the asset when you have to purchase it but…you still have to purchase it. This allows you to budget for lower payments during the term of the agreement. When there is a lower residual value at the end, the payments throughout the terms of the lease are higher.
Clarify transfer options
Understand what happens if and when you transfer the contract or if the contract is transferable at all.
If you decide prior to or after paying off a laser that the piece of equipment was a huge mistake for your practice or you want to invest in newer technology, you need to know your options. Can you sell it to a colleague, sell it back to the manufacturer, or are you stuck with the latest addition to your laser graveyard? Make sure you know what you can and can't do.
Stay on Top
As they say, the devil is in the details. Make sure you are on top of all contracts. Following this practical advice can save you thousands of dollars per year.