Business Contracts: Three Key Areas of Consideration
Not that our world wasn’t already driven by contracts before the current Global Pandemic, but they seem to be at the forefront even more so now. Small Businesses are often intimidated by lengthy contracts with a plethora of legal jargon. Often times, the wording is so unintelligible, following the direction of the document is near impossible.
Red Star Consulting is regularly engaged to assist with the review of contracts and provide guidance on areas of potential issue. We’re always happy to provide this service to our clients. That said, it is important Small Business leadership be able to understand the three of the most critical areas of any business contract. The goal is to offer protection to your business by pointing you in the direction of the most critical aspects of a contract, what to look for, and what concerns you should have if you do not find these sections.
Spotting The Critical Aspects
Most contracts come with something I refer to as ‘The Thump Factor’. Simply, if you were to print the contract out and let it land on your desk, it would make a relatively loud thump. Most are intimidated by the length, jargon, and documentation references used within the document. Trust me – you can only read the terms “albeit”, “forthwith”, and “hereby” just so many times before you disregard them. And you should. They’re just words. Words not often used any longer, thereby giving the presence of intelligence and reason for you to feel intimidated. If you can’t get past a few big words, you probably need to find another line of work. Now, with that out of the way, here are the three (3) areas of any contract you should be focused on:
Exit & Cancellation Clause(s)
Deliverables: The ‘What’ of a Contract
Legitimately, this is exactly what it sounds like: what do you or your client intend to deliver as part of this agreement. While it seems overly simple, rest assured, I wouldn’t be writing this post if that’s what it was.
When contracts are written, vendors and clients arrive in a ‘danger zone’ when there is inadequate explicit detail outlined in the contract. Not sure what I mean? Allow me to give an example, albeit a bit extreme. (See what I did there??)
You go to your local car dealership and you purchase a new car. You have spent days researching this car and you have settled on this one. The salesperson writes up the purchase contract, the paperwork states only that you purchased ‘one car’. After completing your payment, you step outside expecting the car you picked out to pull up in front of you. Alas, you cannot help but hear a squeaky, backfiring, clunker of a car come out from around the back of the building and pull up in front of you. “What is this!!?? This isn’t what I bought!” you may exclaim. However, the salesperson will respond with “But I gave you what’s on the contract – one car.”
Oops. Now you’re in trouble. Perhaps the purchase agreement should have had some additional details on it, don’t you think?
When we discuss “explicit detail outlined in the contract” for deliverables, this is trap you may potentially fall into if not for critical details. The more specific you are in what is to be delivered either by you or by your client, the more likely you are to A) receive what you’ve agreed upon, and B) able to reject work product if it does not meet the required deliverable specifications.
Buying a 2021 Mercedes-Benz G-Class in Obsidian Black Metallic Paint with Black Nappa Leather provides an adequate amount of detail and is significantly different than the clunker the dealership pulled around as ‘one car’. Especially for the $70,000 you just threw down to buy it.
Be particular in what you agree upon and make sure you document all of the requirements thoroughly. Absolutely no work should begin until the deliverables are clearly articulated and agreed upon by all parties involved. This principle goes for ALL industries – whether you’re a clothier, baking wedding cakes, a florist, or even a software developer. Understand at the outset what your clients are looking for and be exact!
Makin’ It Rain
Congratulations – you have come to an agreement on what will be done with this contract. Now, how are you going to get paid for what you’re doing.
Let’s not be shy nor awkward about this. We work to get paid. It’s simple, easy, and completely reasonable. However, as a Small Business Owner, you may not necessarily know there are options for how you can be paid by your client or vendor. Don’t know what I’m talking about? Follow me.
There are several types of payment strategies that can be incorporated into any contract. Some of those are:
Paid in Full Upon Delivery
Down Payment to Begin Work, Remainder Upon Delivery
The first and second bullets are commonly known. Based on our interaction with our clients, the third and fourth bullets are rarely heard of nor used. This is unfortunate as there are definite upsides to leveraging these payment strategies as part of a contract.
Milestone-Based Payments are exactly that. If you are able to break up the delivery of your product or service into multiple, discernible parts that can be brought to your client over the period of the contract, this would be an excellent option for you. This payment model helps your business maintain positive operating capital as you are not having to float the funding of the entire agreement. This allows for you to offset the upfront costs of employees, raw materials, and other contract-necessary materials. Additionally, from more of a business strategy perspective, this model also reduces the risk of your taking a complete loss should your client wish to cancel the contract whereby you will have been paid through your last successful milestone.
Time-Based Payments are more risky, but often times find traction in specific verticals. In essence, regardless of when you deliver your product or service to your client, the client would agree to pay you on a schedule basis that could extend well beyond the conclusion of the contract insofar as the completion of deliverables. This is a tactic used by Small Businesses who are in need of help, but require the opportunity to pay the terms over a longer period of time. (Think Mortgages and Car Loans – very similar in nature.)
Understanding these additional payment models may give your organization more leverage in solidifying an agreement with a vendor who may be hesitant to rely on more commonly held methods.
“Make a New Plan, Stan”… Exit & Cancellation Clauses
Yes – in the Real World, not all contracts agreed upon will make it to a loving, blissful conclusion. Perish the thought! Alas, it does happen. It will happen. And often times, especially in business, more end badly than they end positively. Therefore, there is a critical need to protect your business in the event of such problems, and it is done through Exit & Cancellation Clauses.
Every contract you enter into should have these clauses specifically defined and in a separate section onto their own. Under no circumstance should you EVER accept any contract where there is not a means nor manner in which to terminate the agreement. As you consider these terms, think about the following questions to ensure you have crafted a proper strategy:
Is there a minimum number of days notice my client / vendor should provide before they are allowed to exit the contract?
If my client / vendor is allowed to exit the contract, how do we pay each other for services already rendered that have not yet been reconciled?
Do I wish to have any penalties exacted on my business or my client / vendor for departing the contract?
What is the mechanism that would be used if there are any disagreements between my business and the client / vendor? Court? Arbitration?
Remember, not all contracts are ended due to negligence or failure to fulfill. Many contracts are negatively influenced by the economy (local, state, & national levels), by geopolitical issues, by current political policies and doctrine, and even more simply, just life in general. Especially in the case of Small Business, organizations will go out of business, medical emergencies will limit productivity, or even owners will pass away unexpectedly. All of this to say you should consider the fairness of any of the stipulations of these clauses as you author them and ask yourself, “Would I think this fair if it was imposed on me?”
Absolutely, there is SIGNIFICANTLY more to a business contract that we aren’t touching here. Non-Disclosure Agreements, Master Service Agreements, Payment Terms, Non-Recruitment Clauses, and the list goes on, and on, and on.
Remember these are the three (3) most critical aspects of crafting and/or reviewing any contract. If you can master these areas, the likelihood your business will prosper from the agreement is high. Do not be afraid to ask for help – understanding some of these contracts can take years of experience and an eye for high levels of detail. Never be afraid – business is always business, regardless of the big fancy words someone might use.
Red Star Consulting, LLC is a partner to Small and Medium sized businesses across the country. As the foundation and backbone of our local communities, we see and feel the urgency of helping our local entrepreneurs reach the highest levels of success.
Learn more at https://www.redstarconsultingllc.com.