Contract with signature and pen

The Significance of Contracts

Contract with signature and pen

Don’t let intentions kill your business For some reason, I have yet to understand some would-be business professionals treat contracts like optional add-ons as if these vital business tools are some sort of perk instead of standard operating procedure.

Worse, there are others who seem to think contracts are evidence of mistrust as if both parties knowing what’s expected is somehow an accusation.  Approached properly, contracts are nothing less than a specific list of what both parties understand and agree to, as well as options in case circumstances change. Nothing inherently bad or wrong and plenty that can literally save your business.

Case in Point

I’m going to relate a story as it was recently related to me by a long-time business colleague. I won’t name names, but I’ll keep the details as accurate as possible.

Two business people who knew each other well, mostly from running in the same circles, but well enough to have established rapport and trust decided to create a joint venture. Both trusting in the other’s good intentions and strong reputation, their agreement was not much more than a handshake. They created a document which dictated what each person was responsible for and how each entity involved would be compensated… then they went right to work.

An Unexpected Turn

Well, business was very good, but cash flow was fitful. They had enough to pay the bills, but one partner was beginning to feel overextended. He wanted out. He was willing to turn over their book of business and walk away, but there was one major issue. These guys failed to draft an “If I Want Out” clause in their agreement.

The issues were multiple: outstanding debts, obligations and payroll issues. Not to mention invested outlays and other financial matters. In addition, the one leaving had a skill set not easily or quickly duplicated. Sure, his partner could find a replacement, but it would take time – not to mention more salary obligations.

Unprepared for Surprises

While neither party was particularly disagreeable, none of these factors were spelled out in their agreement, and there were some misunderstandings as to how a dissolution or buyout should be conducted. These disagreements, which could have been easily remedied had their been an agreement in place, created animosity and confusion.

The staff of the joint venture grew nervous, and production slowed. Meanwhile, the disagreement was distracting to both leaders, and their other businesses suffered … all of this because they failed to establish a detailed contract.

Be Prepared with a Contract

Remember, contracts are not about assuming things will go south. They are about explaining to all involved “What Happens When…” Skip this step and you can be sure, at some point, someone will not be happy about what happens next.

David Milberg is a seasoned financial investor in NYC.

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