Tony Arnold: How contract details can make or break your company's future Featured

2:43pm EDT November 1, 2012
Tony Arnold: How contract details can make or break your company's future

Contracts and legal agreements can play a key role in determining whether a company flourishes or flounders, but it’s easy to skip over the details when more urgent matters come into play. Those who don’t come back to those details when the fire has been put out, however, run the risk of bigger problems down the road.

But sometimes the perceived urgency to get the deal done becomes the driving force, undermining the effort, quality, judgment and scrutiny needed to pen a solid contract that’s in the company’s best interest. If the analysis and due diligence takes more time than anticipated, impatience grows and the decision may be made to just get it finished so you can move on.

With so much on the line, you can’t afford to do that. You need to do what it takes to ensure that every agreement is in the best interest of your company and that your rights are safeguarded for the agreement’s term.

Do you sign, or are you responsible for, the contracts your business concludes? Savvy leaders keep their focus on getting the right deal and then they watch for potential pitfalls and red flags in the fine print. They conduct reviews, ask probing questions, understand the terms and financial impact of the deal and are alert for liability issues and balanced termination provisions in the contract.

 

Here’s some advice that will help safeguard your company’s future:

 

Put all business dealings

in writing

Do this even with your partners, family and employees. When there are modifications or changes to your agreement, put them in writing so both parties are aligned. Not only will having a written agreement prevent issues and misunderstandings in the future, in certain situations, verbal contracts can be legally binding.

Clarify the scope of

the agreement

What rights do you have? What can you do? And often more important, what can’t you do? Be sure the boundaries are very clear. Describe geography, markets, improvements and noncompete terms.

Define all of the important contractual terms

Be sure that performance criteria, metrics, timelines and detailed services required by both parties are set out clearly, as well as the consequences of nonperformance along with remedies. Define price, cost, volume by product, forecasting, payment terms, licenses or permits required, registration cost, etc.

Understand the legal terms and their implications

Don’t be embarrassed to ask your colleagues who negotiated the agreement or to ask your legal team the same question multiple times. As a check, ask an individual who hasn’t been associated with the contract to review it and point out potential areas of concern.

Don’t assume anything is obvious or clear

As the saying goes, the devil is in the details. Include formulas, definitions and examples of calculations. Set out potential problems and disputes and how they will be resolved. Define it in a manner where someone not familiar with the business could fulfill and understand the terms of the agreement.

Define the duration of the agreement and the terms for early termination

All business relationships have an end point, so it’s critical that contracts between business entities or individuals make provisions for unwinding the relationship when all obligations are fulfilled. Carefully define each party’s rights and obligations after termination.

Monitor performance and fulfillment of the terms of the agreement

Make sure the company lives up to its responsibilities under the contract to protect its reputation and business relationships.

A solid contract answers all of the “what ifs.” What if the other company goes out of business or is acquired? What if your contractual partner doesn’t fulfill its obligations under the contract? What if there’s a truckers’ strike that prevents ground shipment of the raw goods you need?

Become practiced in setting out and answering all the “what ifs,” and you’ll find yourself among the gold medalists in the contract game.

 

Tony Arnold is founder and principal of Upfront Management, a St. Louis-based management and executive consulting firm. He can be reached at (314) 825-9525 or tony@upfrontmgmt.com.