Why your business needs written contracts
As a lawyer, I am constantly amazed at how much business goes on in the world without the benefit of written contracts. I can also tell you that I have earned a good living as a trial lawyer dealing with the resulting mess of having no written contract. Sometimes business relationships proceed without a hitch despite no written agreement, but more often or not, and sooner or later, a dispute arises and you’ll wish you had put your agreement in writing. Here are a few more reasons why you should make written contracts a indispensable part of every business transaction into which you enter.
1. You are forgetful (and so is everyone else). You should understand every word of your contracts and so should the other person signing it. A written contract allows each side to fully understand what they are agreeing to at the time, and refresh their memories later on because all of us forget things. It will save many emails and phone calls if your contract answers most of your questions as you go along in the business relationship.
2. Contracts explain to potential customers how you do business. Potential customers should be able to review your contract in advance of signing so that they can understand how you conduct business. If potential customers repeatedly balk at signing, maybe you need to make modifications to how you are doing business, or maybe they aren’t the right customers for you.
3. Board members and business partners may need to review your contracts. Your business partners, board members, and sometimes shareholders will see contracts you negotiate. Even though they may not have been present for the actual negotiations, they should be able to easily understand what the company has committed to doing, within what time frames, and what the expected compensation is. It is also important to know what would happen if your company found it necessary to breach the contract.
4. Funding sources may need to see your contracts. Whether you are applying for a loan, seeking angel investors, or new stockholders, they may need to see your existing contracts in order to evaluate the nature and scope of your business, expected revenue streams, and staffing commitments.
5. Potential buyers will want to see your contracts. If you anticipate any mergers or acquisitions in your future, keep in mind that due diligence prior to any such transaction will involve a review of your contracts for the same reasons as funding sources would look at them, though perhaps with a different angle.
Contracts don’t need to be complicated, but any competent business makes sure they are all in writing. Even if you don’t hire a lawyer to draft one (I’m realistic, I know at least 75% of you won’t), write a document that thoroughly explains what everyone is committing themselves to do, when, where, and how (especially payment terms), and get it signed by both sides.
