Business Contracts. For those of us who are entrepreneurs and business owners, they are what define the deal. Business contracts can be expressly made or they can be implied by the conduct of the parties. All that is required for a business contract to be formed is an offer, an acceptance of that offer and consideration. Really, what this all boils down to is a mutual agreement or mutual inducement to contract. Simply put, two people want to do a deal together. That is their intent. That is their action. That they have the proverbial “meeting of the minds.” Finally, consideration is required. Consideration, in its simplest form, is value exchanged, a promise to exchange value or an exchange of promises. Consideration can be either the exchange of money, the promise to exchange money or a promise that you are going to do something for someone else if they promise to do something back. If you meet those three elements, you have a contract. Keep in mind, if you are missing any one of these criteria, you do not have an agreement.
The biggest mistake I see entrepreneurs and business owners make in attempting to enter into a contract is that they might talk about a deal but there won’t be any consideration for it. Because of the lack of consideration, there is no deal. On the one hand, a party thinks, “We’ve got a deal,” and on the other hand, the other one doesn’t believe there is a deal because there wasn’t any exchange of money, or there was no promise of an exchange of money. That’s where entrepreneurs and business owners fall into gray areas as to whether there is a deal or not. Whether your business is in sales, distribution, or services, each type of business deals with so many different aspects of contract law.
There are deals with point of sale consumers, deals with distribution and delivery of products, deals involving the performance of services, and deals between business owners. There are deals with various licensing agreements and with permits. There are financing issues involved in pre and post-production of products and distribution. Lastly, there are deals with employees. From a corporate and business standpoint, there are shareholder agreements, operating agreements, investor agreements and various other agreements for facets that make a corporation a corporation.
Business owners and entrepreneurs can deal with a hand shake. They can deal with a pat on the back. They can spit in their hand and shake the other person’s hand. With the exception of certain types of contracts (which is beyond the scope of this article) a contract can be made in any manner so long as there is mutual assent between the parties and a meeting of the minds. Problems arise when it comes time to prove the existence of a contract after the fact. To paraphrase a wellknown California judge, “Hey, we’re dealmakers not lawyers.” Right? As a business owner and entrepreneur, we all want to get the deal. But don’t want to have to worry about the details that need to go into an business contract. We want the hustle. We want the quick fix. We want to shake hands and pat backs, all over lunch. Entrepreneurs and business owners don’t do contracts. You do lunch. You do coffee. You do happy hour and write details down on the back of napkins. That’s what this is about. As business owners and entrepreneurs we are used to these handshake deals. It’s business built on relationships. You talk with one person, and you get three leads to the next one. You’re constantly pitching what it is that you want to do. It’s the hustle we love so much.
But what happens when that network of people breaks down? What happens when you build a relationship with someone and it turns out that relationship is not what you expected it would be?
On one occasion, I did a shareholder agreement for two men. They were two buddies from college. Both had higher education degrees in architecture. One of them came to Colorado before the other one and opened up a very successful architecture firm. The other soon followed and started working for him. The two of them were the best friends in the world. Their kids hung out together; they went on trips together, their families were very close.
But what happened? Even though we had completed a very detailed shareholder agreement and business contract documenting the responsibilities and obligations of each individual, their relationship eroded. For some reason, once you start getting involved in business with friends, the friendship begins to dissolve. I have seen many businesses between friends fail. I don’t know why. I think very few people have been successful in being able to nurture the friendship throughout the business relationship. At some point, one of the two facets, business or friendship, falls apart. Maintaining both is a very, very difficult task.
So, how do you get past all of this? What do you do when your friendship breaks down and you have nothing definitive in writing to document your business contract other than a pat on the back or a handshake? Well, over the years I’ve come up with some tenets that I think will help entrepreneurs and business owners throughout the business contract making process. I’ll address those in the next segment of this basics for business contracts.