Small business owners negotiate on a daily—if not hourly—basis concerning a wide variety of matters. Most of these negotiations take place quickly and informally, but some business transactions and relationships are important enough to memorialize in writing through a written contract, so here are a few tips for small business owners to consider when it comes to contracts.
TIP #1: If it is important, put it in writing.
The problem with verbal agreements or the proverbial “handshake deal” is proving the precise terms and conditions of a verbal agreement. If the terms you think you agreed to are not in writing, in the event of a dispute, you (probably) lose.
- Are all material terms in the written contract? Leave them out at your own peril.
- Who drafts? It might cost a little more, but the party drafting the document will inevitably have more control over the content of the contract.
- Who signs? The person signing a contract must have authority to bind the named party to a contract.
- Where is the fully executed document? You might be surprised how often a party needs to enforce a contract, but cannot find a signed copy. Losing the written agreement defeats the purpose of having one in the first place, so be sure to keep your paperwork organized (and save electronic copies of any important contracts). If you discover the contract was never signed, then you have an even bigger problem.
TIP #2: Don’t blindly use forms you find online.
- Contracts must be tailored to your unique facts and circumstances, there is no “one size fits all” when it comes to business contracts.
- Be careful about “recycling” documents from previous deals. Every business transaction or relationship has its own wrinkles, facts and circumstances change and, believe it or not, the law changes from time to time.
TIP #3: Don’t fall for the old “it’s our standard form contract, we never revise it.”
- Most “form” small business contracts are revised all the time.
- Most terms and conditions are open for negotiation.
- Side documents (e.g. an addendum or letter agreement) can memorialize negotiated terms without harming the sanctity of the “standard form”.
- You always need to acknowledge relative bargaining leverage between contracting parties and adjust negotiating strategies and expectations accordingly. A business attorney can help a small business level the playing field to some degree and enhance your level of understanding of a contract and whether specific terms are “typical” or outside the realm of reasonableness.
TIP #4: Have a clear exit option.
- Always look for a termination clause in a contract and understand what it means. Without a clear termination clause, a party’s ability to get out of a bad deal may be limited and expensive.
- Does the agreement have a defined term or specific expiration date?
- What are the deliverables and have they been provided or performed and have they been accepted? Disputes are likely to arise if specifications and acceptance procedures are vaguely defined or not addressed at all in the contract.
- Does the agreement have an alternative dispute resolution provision (e.g., mediation, arbitration)? Generally speaking, resolving disputes in court through civil litigation is a horribly expensive and inefficient way of resolving disputes.
TIP #5: Consult with a business attorney… BEFORE YOU SIGN THE CONTRACT.
- Having a business attorney draft or review your small business contracts will help:
- Increase the likelihood that the written contract reflects the substance of the business deal you have negotiated
- Reduce risk of confusion and controversy in the future
- Allocate risks in an efficient way
- Identify and address important issues that you had not considered