The (No) Termination for Convenience Playbook

Acadia National Park, Maine; photo by the author

Everyone in SaaS sales has seen it: the dreaded termination for convenience clause (often abbreviated TFC), typically inserted by a buyer during redlines without fanfare and almost always without comment. The clause is short, but packs a wallop. It looks something like this:

Customer may terminate this agreement for any or no reason upon thirty (30) days written notice to Vendor.

Unlike many contract clauses, this one has no hidden meaning: the customer can walk away from the contract whenever it wants, and for whatever reason, and the vendor gets nothing.

There are many reasons that SaaS companies dislike termination for convenience clauses. For example, they increase the risk of not recovering the full acquisition cost, which typically is greater than 12 months. They complicate revenue recognition if there are changes in fees during the anticipated term. And a potential acquirer might discount the value of contracts that include such a clause.

In my opinion, these are bad reasons to dislike termination for convenience clauses because they’re selfish: they concern the impact on the vendor rather than on the customer relationship. You shouldn’t expect positive results if your decision-making is focused inward.

In the enterprise, customer success doesn’t come solely from the software doing what it’s supposed to do; it also requires mutual organizational commitment. Termination for convenience eliminates this commitment in a literal sense, which has the effect of weakening it in practice, too. This is the reason why I never agree to termination for convenience clauses: they create unbalanced relationships in which the vendor is obligated to invest in making the customer successful, but the customer is not obligated to support this investment through continued payments.

There are smart people that disagree with me, in particular Jason M. Lemkin (see here and here). They argue that the vendor should have to earn the customer’s business, month in and month out. I agree with the principle but not its association with termination for convenience as a forcing function. In the enterprise, the vendor’s effort alone is not sufficient to make customers successful, and because I believe contracts should mirror reality, termination for convenience has no place in SaaS.

Or as HubSpot puts it in their pricing FAQ:

Marketing Hub Professional and Enterprise contracts are billed annually by default. We’ve found that customers who can commit to a full year of using HubSpot will be more successful inbound marketers in the long run. And since your long-term success is our goal, we want to encourage those practices that support that goal.

Well put.

So how can you avoid termination for convenience clauses making their way into your signed SaaS contracts, particularly with larger customers that are more likely to insist on their inclusion (and, perversely, have the most to lose from a weakened relationship)? What follows is the playbook I’ve used to great effect in negotiating nearly $300 million in total contract value throughout my 15-year career. Although I don’t have exact numbers to hand, I estimate fewer than 2% of that total contract value was subject to a true termination for convenience clause.

The playbook is simple:

  • Be direct about your unwillingness to include a termination for convenience clause. This is one situation in which reversing and pain funneling are not your friends.

Even after you deliver the message, the customer (usually procurement, but sometimes legal and less frequently the business buyer) often will engage in a two-part attempt to get you to agree to include one anyway.

Part 1: The Justification

The first part is for the customer to explain why they “need” a right to terminate the contract for convenience. There’s always an initial justification, and it’s usually followed by one or more additional justifications that are only introduced after you dismiss the initial justification.

Here are the justifications I’ve heard and how I handle them:

  • It’s very unlikely we’d ever use it / we’ve never used it before: Contracts are legally binding. If it’s very unlikely you’d ever use it, or you’ve never used it before, then it’s unnecessary and punitive against the vendor and shouldn’t be included in the contract.

Part 2: The Bargaining

After justification comes bargaining: the customer’s attempt to save the clause by watering it down in one or more insignificant ways.

Here’s the bargaining I’ve heard and how I handle it. Read these as what about keeping the termination for convenience clause, but…:

  • With more than 30 days notice: Don’t bite; just say no (although I suppose at some point I would say yes, e.g., 180 or more days for a 12-month agreement, because the financial pain of exercising the option would render it unpalatable).

I hope this post helps you to successfully avoid termination for convenience clauses in your SaaS contracts. If there’s a point to this post, beyond my opposition to termination for convenience clauses in general, it’s this: it’s rarely enough to tell a customer no; you almost always need to walk them through why a right to terminate for convenience doesn’t mirror reality, and is in fact detrimental to their own future success.

Chief Customer Officer at Brightflag. I write about issues relevant to and situations faced by SaaS companies as they scale.