Would you invest $5,000 with the potential to make $100,000 in three years?  Most of us would without too much thought.  Would you invest that much or less now to potentially save $100,000 over the next three years?  Unfortunately, far too many entrepreneurs pass on that opportunity when they should be embracing it.

Virtually all business takes place through some form of a contractual relationship.  Those relationships can be formed through oral agreements, written agreements, or even by virtue of the conduct of the parties.  The informal oral agreements or agreements resulting from the parties’ conduct can carry us through routine things like purchasing or selling products on a retail basis.  However, the same is not true when it comes to significant business dealings. In fact, this is one area where 20% of the issues can cause 80% of the problems.

Most businesses would benefit greatly by having well-crafted written contracts for major transactions such as significant equipment purchases and leases, procurements, sales, key employee agreements, real estate acquisition and leases, and the like.  Business owners that utilize attorneys to help negotiate, write, and use solid contracts in their business will realize a significant return on their investment through reduced risk, more successful relationships, and reduced professional fees.  Those who do not will often face failed business dealings and potential expensive litigation that can quickly turn a profitable year into a disastrous loss.

A well-written contract has many benefits, including –

• Providing irrefutable proof of the deal that was made;

• Defining the parties’ obligations to each other in an unambiguous manner;

• Outlining available remedies and rights if one party fails to honor its obligations;

• Reducing the risk of disputes and future misunderstandings; and

• Providing a fair and equitable means of settling any disputes that do arise.

Business dealings on a handshake, or a poorly written contract, expose the entrepreneur to a number of risks –

• Key deal terms are left to interpretation and dispute that will require a judge or jury to resolve;

• There is no irrefutable evidence of the terms of the deal;

• Memories become convenient or fail when disagreement arises;

• The parties may not have rights or benefits from the deal that they thought they had;

• Payment and performance terms may not be as clear as one would think; and

• Depending on the type of agreement, it may not be enforceable at all without a written contract.

Business owners should not blindly sign customer or vendor contract forms since they are typically very one-sided in favor of the other party.  Those contracts should always be reviewed by an attorney before being signed, and unfavorable provisions should be negotiated.  One simple example comes to mind.  Most written contracts have provisions for the law to be applied to the contract as well as the location for any dispute resolution.  I recently reviewed a contract for a construction project in the DFW area that would require my client to litigate any dispute that might arise in the courts in New York City.  Not only would that be unfair to the client that had never conducted business in New York, but it would impose exorbitant cost and inconvenience upon that client all to the benefit of the other party.  If that were to occur, that one provision alone could quickly turn a potentially profitable deal into an expensive loss and lesson. Faced with the threat of having to litigate a dispute in New York, the client may be more likely to concede the dispute rather than incur the hard and soft costs of litigating in New York. 

While that example is easy to address, more complex provisions require closer attention. For example, there are pits for the unwary in contracts requiring one party to purchase the other’s output, take or pay for products or services, or pay liquidated damages that can be very expensive holes if those contracts are accepted without an understanding of how they are treated under the law. In most situations, business owners should not blindly accept their customer’s or vendor’s form contract since most will find those to be very one sided.  Owners should always push for the most favorable terms they can negotiate. With the right approach, most deals can be negotiated to arrive at a contract that is balanced and fair to both parties. 

Entrepreneurs are also advised to avoid reliance on websites that provide legal forms for free or at low cost as those sites typically do not adequately meet the needs of most businesses.  Those forms were not written with a specific business or transaction in mind, but are typically so generic that they provide little comfort when disagreements and disputes arise.  They were not written for your business or your deal.  We have all heard the expression “You get what you pay for.”  But, the more important corollary is, “You don’t get what you don’t pay for.” And, the fact of the matter is that reliance on those types of materials will eventually cost you many multiples of what you thought you were saving.

A good lawyer will learn your business, pay attention to your needs and expectations, work with you to get the best deal, and help you stay out of expensive litigation.  With the cost of trying a lawsuit easily exceeding $100,000 plus the stress on the owner and business, a small investment up front can can reap big rewards down the road.