Business Contracts: Are handshake deals enough?
Put your contracts in writing!
I can’t tell you the number of times I’ve seen friends and clients get screwed because they thought they could formalize a business contract relationship on a handshake deal. I’m sorry, but the old ways of doing business are gone and the handshake deal is dead. I’ll say it again, THE HANDSHAKE DEAL IS DEAD! You’re being ignorant or naïve if you think you can spit in your palm and shake a hand and hope that everything will be hunky dory. Trust me, it won’t.
Think of a situation where you go to someone’s office, or for coffee, or for lunch, and you sit down and start talking about your next greatest business venture or how you want to “partner up” with your best friend. Or, better yet, you show up at lunch and somewhere between your French and your dip you think to yourself, “That seems like a great idea! Why don’t we go ahead and do that. We should be partners!” Or, maybe you decided to put on a tie today and meet in a conference room to put something together under more “formal circumstances.”
I am all for sitting down, breaking bread and nailing down the deal points to the next greatest business venture. Heck, it’s the best part of making money, right after making money. If you are going to engage in these types of conversations, whether it is dealing with someone on the telephone or sitting down with them, you have to put together a “deal memo” recapping the conversation.
A deal memo says something along the lines of “pursuant to the conversation earlier this afternoon, it is my understanding that we are going to do the following….” Now, I realize that’s pretty generic. But, this doesn’t need to be the full on detail of the agreement, although the more details you can get in the better. I usually conclude my deal memos with, “If this is not your understanding of our conversation, please let me know immediately.” This way, if your future business partner doesn’t get around to doing what he/she said he/she would do, if it ever comes up in court down the line, you can say “we met for lunch, we discussed these deal points and immediately that afternoon, I typed a letter, sent it to this person, and told him to let me know if he didn’t agree”. And that person will be sitting on the witness stand saying “yes, I did get that letter, and no, I didn’t tell her that I didn’t agree with her.”
There are number of ways that you can go about getting your deal memo together. You can have your secretary write it up for you or you can hire an attorney to do it for you. If you’re insistent on doing your own legal work (another really bad thing to be doing and the subject of another article down the line), write it up yourself. It’s better than nothing. The important thing here is that you can your habits. Stop believing you can remember the points of the contact and stop believing you don’t need a written contract. You have to learn to do these things and you have to be disciplined enough to follow through. You have to take your business seriously. Be an entrepreneur not a wantrapreneur. Entrepreneurs and business leaders get the details done. Business men and women have to learn to do these things. Otherwise, problems will continue to plague you.
You have to get something in writing. The whole purpose of having a written contract is to prove the nature of the agreement between you and the people with whom you’re doing business. But, if don’t want to take the time to put together the details for a contract for your specified needs, you could settle with a boilerplate agreement. Boilerplate agreements are standard form contracts. Think of these agreements as a “fill in the blank” type of an agreement; they are very basic and are typically not catered to any specific situation. Both parties sign the boilerplate agreement and, abracadabra, you have a contract. If you are happy with the agreement, toss it into your file and move onto doing the work. If the need ever arises, you have a written agreement with the signatures of both parties.
Now, personally, I am not a huge fan of boilerplate business contracts. In fact, I hate them. However, I do think they can serve a particular purpose in some instances. Especially in a situation where the services or sales being provided don’t change or are otherwise routine in nature. But when is anything in business ever routine? As I discussed earlier, entrepreneurship and small business is about relationships. You can’t build a good relationship with a generic business contract. The good thing about boilerplate business contracts is that they are quick, but they can create distance between business individuals because they don’t nurture any significant business relationships. You don’t sit down. You don’t negotiate. You don’t talk. You don’t create an atmosphere of wanting to do business with the other party. Part of being an entrepreneur or business owner is building a solid relationship with the people you do business with. You have to find a comfortable medium between being “all businesses” and building your relationships.
If you have a business contract that everyone involved is happy with, it is less likely that you will have problems with it down the line. If everybody is happy, there is no reason to sue anyone (assuming everyone complies with the contract terms). Lawsuits usually happen because one of the parties is unhappy. One might be unhappy because he/she feels like he/she was taken advantage of in a business deal. By putting everything in writing, you avoid those pitfalls and you build the relationship. You go through the negotiation process. You fine-tune the aspects of your contract in order to help build and facilitate the relationship with everyone involved in the deal making process.
As a small business owner and entrepreneur one must be very detailed in the brand of business work that you do. A deal memo is the simplest form of recitation. At the very least, put together an outline of the agreement you are going to put together. The deal memo also makes it clear that you are going to enter into another agreement down the line that will fill in all of the little details. Get the major points when people are going to get paid, the timeframe of the project and all of the other aspects will be done at a later date. Small business owners and entrepreneurs typically call this the “Letter of Intent” or LOI for short.
Don’t get fooled however. The first deal memo is the first business contract. A LOI is as binding as any other formal business contract. Then, once the terms of the LOI are completed, you can move forward with the second contract which has more detail. But this first contract is still a contract it still binds the parties. It still contains promises. It still holds mutual understanding and inducement.
Sometimes you can have lunches and meetings with people, and follow it up with a letter afterwards. Then, the ball is in their court. And good work for you. You have just managed to protect yourself. Don’t concern yourself with whether the other side to a business deal is protected. If you are going to get into a dispute about this business deal, better you be protected.
We’ve all engaged in business dealings with entities much bigger than our own. In those instances sometimes, those businesses can hold their thumb over your head and say, “If you don’t like it, get out the door because there are plenty of other people in line wanting to do business with us.” Being a small business owner and entrepreneur can put you in a difficult position. But that doesn’t mean you don’t have any rights, and it doesn’t mean you don’t have any negotiating power. And it is important to explore that confidence and not take at face value these business agreements big corporations throw at you. I think people are under the impression that they don’t have the personal power to disagree and say, “I don’t like this part,” but in actuality they do have that power. In every business deal, there is always room for negotiation. And the power resides with the individual who is willing to walk away.
Forget the handshakes. Forget the pats on the back. You can have oral business contracts, but the problem you will run into is proof. Without a writing all we small business owners and entrepreneurs will have is our word against the other party’s word. And it’s hard for courts to make decisions based on credibility alone. How do you go about proving what somebody else said? How do you go about proving what the deal is? How do you prove that you are more credible than your business associate? The proof is in the paper.
