Your first contract is an important milestone.
The latest info & advice to help you run your business.
It means you’ve convinced another business or an individual customer to hand over their hard-earned money in exchange for your services. Your venture is truly a serious enterprise, not just a hobby.
Because this is such a crucial step, making sure you get the contract right is all the more important. Countless businesses lament not signing a contract properly, or not putting in as many protections as possible.
Especially when those little mistakes come back to bite them.
“I had somebody call me once that had used a contract online, and they’d just copied and pasted all the text and replaced their name,” says Elizabeth Lewis, a lawyer specializing in small business in Denver. “But the states where disputes had to be heard didn’t change. So they had to sue in New York, and they hadn’t read the contract.”
And that’s just one way things can go wrong.
Here are a few best practices to keep in mind as you start developing your first contracts, but be sure to seek legal counsel before creating or negotiating your actual agreements.
Tips for setting up a business contract
#1. Get specific
This seems basic, but Lewis says she sees this mistake all the time: Contracts just aren’t clear on what services will be provided.
“With a website design, it won’t be clear. They won’t say if they’re designing five pages or 100 pages,” she says. “If you’re building something, are there time limits?”
It isn’t so much that the expectations can be extreme, according to Lewis, it’s that everyone is friendly until something goes wrong.
“Not having the specifics means it will go to a third party or mediator, who will ask what the intent was between the two parties. Then it becomes a he-said, she-said situation,” she explains. “Whereas if I say that I’m going to build you a house by March 1, it makes it really easy.”
The bottom line is don’t rely on a “gentleman’s agreement” when it comes to business. You want to get as specific as possible.
#2. Limit your liability
Contracts aren’t just about saying what you’ll do and when you’ll do it. They’re about protecting yourself when things go wrong.
To that end, Lewis says you need to limit your liability as much as possible. That includes limiting warranties to what you think will be realistic, if you even want to warranty anything at all beyond what the law requires.
You also want to make sure financial penalties for anything that goes wrong are as realistic as possible.
Lewis says it’s important to include clauses like the following to ensure you’re not paying out the nose if the contract isn’t met:
“The parties agree and acknowledge the limitation of liability of either party is at a maximum of 1x the total contract price.”
#3. Think of the worst-case scenarios
We never want to think about them, but if they happen you’ll wish you had.
Lewis recommends getting a lawyer to help draft language that covers you if, say, you become seriously ill and aren’t able to fulfill a contract.
It’s a depressing scenario, but also not outside the realm of possibility.
“I’ve seen situations where there isn’t a clause that covers what happens if [a business or contractor] can’t do their job anymore,” says Lewis. “Or what about if payment isn’t made, what do you do then? Are the terms 60 or 90 days? You need language to cover these scenarios.”
Also be aware of scenarios specific to your location, industry, or type of business.
“If you’re moving into a new area, I always think it’s a good place to start by talking to somebody who’s been in that field for a while,” says Lewis. “Call people up and ask, what kind of issues have you seen?”
#4. Cover your rights
If you’re a creative professional, everything you create is your intellectual property (IP). If you don’t have a contract stating that explicitly, then you’re out of luck when it comes to potential legal battles later on.
“I’ve had businesses contract with a web designer, and there is nothing in there about what’s being created and who owns the IP,” Lewis says.
“It’s always cheaper in the long run to talk to an attorney now than try to fix things later on when it all goes wrong.”
Tips for negotiating a business contract
Once your legal terms are all in place, it’s time to ensure your business terms are as good as they can be.
While each contract negotiation has its own intricacies, there are some general tactics you can use. According to Stephen Key, co-founder of InventRight and an expert in intellectual property, negotiation usually takes longer than you think—so be prepared.
“Everyone wants to get this stuff over with, because it’s not comfortable. But I think you need to slow it down,” he says.
#1. Ask a ridiculous number of questions
The art of negotiation is also the art of knowledge. The more you have, the better position you’ll be in later on. Key says during the negotiation phase you want to get some momentum—and you can only do that by getting more information.
“It’s like a first date,” says Key. “You don’t bring a bunch of baggage with you right then; you just ask a few questions upfront so you know where you agree or disagree.”
Those questions could be anything you want to ask about their business, for example:
- How long have you taken to get projects off the ground?
- What problems have you encountered?
- What are your cost structures like?
Get as specific as possible.
“They will be more willing to give you answers at the beginning,” Key explains, “because you’re both just trying to interview each other. These are just casual conversations.”
Once you have that information, negotiating becomes easier. You can start to offer terms that you know they will say yes to.
“So let’s say you’re going to license technology. You might ask, ‘Do you want an exclusive agreement?’ to which they will say, ‘Of course!’ I’m building momentum there,” says Key.
#2. Know who you’re dealing with
Don’t just do your homework on the business, says Key. Find out who is going to be at your meetings, and then do background homework on every single person in the room—including assistants.
“I was in a meeting recently and they didn’t look up who I was, and we started talking about volume of sales. They didn’t understand my speciality was using that information to get higher royalty rates,” says Key.
“You should always, always ask who is going to be at the meeting. The quietest person is the one you need to watch out for,” he adds.
#3. Consult experts
Just because you’re a small business doesn’t mean you can’t call on big experts, even for a few hours to do some consulting.
“Businesses bring me in on IP issues, and often the other parties in the room don’t pay attention to me,” says Key.
Having an expert with first-hand knowledge of the process simply gives you a greater advantage without obstructing the negotiation process.
#4. Don’t bring your lawyer at first
While it makes sense to hire one, Key says you don’t want to get them involved at the onset of discussing business terms.
“I’ve never brought an attorney to any negotiation meeting,” he says. “Where I might bring them in is closing, where there are just a few small issues that need to get settled.” If you’ve done your legal homework as we’ve outlined above, you should only need to bring in a lawyer to tie things up.
One good trick Key uses during negotiation is to repeat something out loud if it sounds too ridiculous. Often, the other party will realize just how silly it sounds.
“If you ask them a question, read it out loud and say, I don’t understand this. They’ll hear [the issue] themselves,” says Key.
#5. Remember to have a sense of humor
Business is serious stuff, but at the end of the day, if you aren’t having fun what’s the point?
Key says keeping things light won’t just help your sanity—it can help you get a good deal.
“Negotiation needs a sense of humor,” he says. “No matter how great your business deal is, if they don’t like you then it’s not going to go well.”
Remember, creating a first contact doesn’t have to be a difficult process. Follow the advice of experts you trust, and it can be a genuinely enjoyable experience. Just keep in mind: the more effort you put in now, the more pain you’ll save later on.