PrintYou may think you and your client, vendor, or employee have a solid, trusting relationship and that a verbal agreement is all you need to do business. Unfortunately, no matter how good your relationship is, relationships change -- and an unforeseen dispute can cost your business a lot of money if the matter lands in court. That's why it's crucial to protect your small business with well-written contracts.
A contract is a legal agreement between two or more parties covering the "who, what, when, where, why, and how" of a transaction. The contract should be as detailed as possible, and it should include any exhibits, drawings, charts, or other data required to make it clear and complete.
You may have negotiated your contract terms verbally when making a business deal, but having everything written in a contract can avoid misunderstandings later on. It's important that a contract account for all possible scenarios, including:
- What happens if the project or product misses a deadline?
- What if a product misses a delivery date?
- Can the contract be modified or voided? If so, under what circumstances?
When it's time to draft a contract, start by determining what types of agreements your business is likely to enter into.
- Employee contracts: These agreements document the terms of employment to help protect your business from employee lawsuits.
- Services contracts: These are necessary if your business provides any kinds of services. The contract documents the terms and conditions of providing the services, along with each party's responsibilities and limitations of liability.
- Confidentiality agreement: If you're discussing a potential business deal or sharing other sensitive information with another party, you'll need this kind of agreement to ensure the other party will keep the information in confidence.
- Sales contract: For businesses that sell products, you'll need a sales contract that lists prices; terms and conditions for sale, including taxes, payment, and credit terms; and warranties, liability limitations, and disclaimers.
Taking a look at a sample contract in your industry will give you something to start with and then build upon. If you belong to an industry association or trade group, you might contact the organization for guidance, or you can search for sample contracts online. Also remember that an attorney should review your final draft.
Many vendors or clients will have their own contracts, but if no contract exists, it's smart to offer to draft one yourself. You'll need a contract down the road anyway, and starting from scratch gives you the flexibility to include the terms that are important to you.
Never sign a contract without fully understanding it. If you are unclear on any point, ask. (The old saying "Never assume" applies doubly to contracts.) Everything in a contract can be negotiated -- and should be, if you have any issues.
Having every contract reviewed by an attorney may be cost-prohibitive for a small startup, but at the very least, have an attorney review large or ongoing contracts that could have a disproportionate effect on your business's finances.
Also have an attorney review the standard contracts you are using. To keep costs down, use templates and modify them until you think you have covered all key points. Then have an attorney finalize the documents. Spending a little money when creating a contract can save you a lot of grief later.