I’ve never had to write a contract…but I’ve signed plenty of them (employment contracts, tenancy agreements, etc.).
I typically skim over them, vaguely looking for anything ominous, before signing on the dotted line with a flourish.
I know I’m not the only one. Contracts are just so…boring.
Some contract writers take advantage of this. They add a term or condition they know you won’t like, hoping you’ll zoom right past it. But this doesn’t always work in their favour.
So, how can you ensure the contracts you’re writing are any good? Mark Ford has plenty of experience in this area, so I’ll hand you over to him.
How to Make Business Deals That Last
By Mark Ford
If you think making good business deals is all about driving hard bargains and writing binding contracts, you are thinking with half your brain.
There are times when being tough and tenacious is necessary. But there are also times when you have to be soft and flexible, too.
Like everything in life, being a good dealmaker requires both the yin and the yang.
Yes, you may be able to get what you want by acting the bully or by strategically backing the other person into a corner. But that sort of approach to deal-making can and probably will backfire on you — if not immediately, then almost certainly over time.
JSN, the man who first taught me (and helped me) get rich, was a ruthlessly ‘successful’ negotiator, and was widely known for his ability to get business associates to agree to his terms. And he was quick to follow up on those agreements with ironclad contracts that bound them to those deals. The combination of the two almost always resulted in an advantageous position. Later on, after the ink had dried, people often regretted what they had agreed to. JSN felt that was ‘on them’. It never felt right to me.
By watching what he did, I came to understand how he was so effective in negotiating deals. It was a combination of being prepared and employing negotiating ‘tricks’, and sheer force of will. But when it came time to make my own deals, I rarely followed his example. Partly, as I said, because it didn’t feel right, but also because I saw the long-term effect of his approach, which was generally bad.
What happened was this: In four cases out of five, the deals fell apart after it became clear that the other person had gotten the short end of the stick. This was true even though the contracts were very clear.
Business partners who felt outmanoeuvred found ways to circumvent the agreed-upon terms. Or they simply reneged. Battling it out in court? JSN tried that once or twice. It was very expensive and ultimately fruitless.
Meanwhile, with each dispute, his reputation as someone ‘you don’t want to do business with’ widened. Eventually, his window of opportunity got very narrow.
I’m not against preparation and strategy when it comes to negotiating deals. But the goal should always be to make win-win deals, not to ‘take care of number one’.
And that is not even enough. If you want to have the best success at making great business deals, you have to be able to change the deals you make if and when, for whatever reason, they become unfair to your partners.
I’ve done that many times. I’ve taken less and given more when it was clear to me that the original deal was no longer fair. In most cases, I made those adjustments before they were asked for. My reasoning was simple: If I wanted the deal to last, then I had to demonstrate at all times that I could be fair.
What I’m saying, in short, is this: Negotiate only win-win business deals and be prepared to change them if and when they become unfair to your partners.
You would be right to wonder whether, given my views on making deals, there is any reason at all for written contracts. You may think, ‘Wouldn’t it just be better to make all relationships oral, non-obligatory and temporary?’
The answer is no.
I do believe in using contracts. But their purpose should be primarily to define expectations and anticipate change, not enforce whatever decisions seem right at the time.
Here’s an example:
You and I come together to start a business. I have the money and the knowledge to get the business going, but I don’t have the time. You have the time, but neither the money nor the knowledge.
The natural course of this sort of business relationship is going to be one-sided one way for several years…and then one-sided the other way for many years thereafter.
In the beginning, I’m going to be providing most of the value — in terms of money and knowledge. Once the business has matured, you are going to be providing most of the value. In fact, I’ll be providing little, if anything at all.
Still, we might say that a fair deal for such a situation, assuming you are going to be paid a salary from the business, is that we are going to be partners for life. I couldn’t get the business going without you, and you would never be in the business without me. I am giving you the chance of a lifetime, and you are giving me the means to add to my wealth.
In such a case, we might have a contract that lays out the framework for a ‘fair’ deal. We might, for example, allocate a salary to you from the beginning that increases, according to some arms-length parameter, as your skills improve. In addition, we could include a bonus based on the company’s profits. The equity and profit distribution could be 50/50.
This is a deal that will seem generous to me and fine to you when we first make it. But years later, when you are doing all the work and the business doesn’t need my money or knowledge anymore (when, in fact, your knowledge will have exceeded mine), the 50/50 part may no longer seem fair.
That’s why you have a written contract instead of just a handshake agreement. You negotiate for fairness in the beginning — and you use the contract later to remind you of why you thought the deal was fair.
Memorials, not guns
MT has written more contracts for me than anyone else. He’s not only one of the most capable attorneys I know, he’s also a great natural businessman. Here’s what he has to say about contracts:
‘Contract law is more esoteric than you might imagine. Judges first must ask (and this is the standard contract question), “Did the parties have a meeting of the minds?” In my law school days, I thought to myself that this sounded more like Star Trek than what I thought law would sound like. But it’s true: For a contract to be valid, it must first show that there was a “meeting of the minds”. And this means your language cannot be ambiguous. The terms must be clear. The exit strategies must be straightforward. The payment terms cannot be based on conditions that are unclear. In short, clarity is the key. If not, the other side says, “Well, your Honour, I understood the language to mean this and not what he said.” And if the language is unclear, your contract may not be a contract after all. The judge may say, “Well, there was no meeting of the minds here, and I can see why — because the language was ambiguous. I hereby rule the contract null and void, since it was never truly formed.”
‘As for creating one-sided contracts and thinking you’re getting away with something, I could not agree more with Mark Ford. Legally, a one-sided contract only leads to breaches and litigation. Make a contract clear and fair, and you’ve got yourself a good deal. In the end, the process of signing a contract is really just a way to ensure that each party understands the deal. It’s a “memorial”, not a future gun. Memorials make money. Guns kill.’
Three things a good contract must have
What I said about formal business contracts applies to informal contracts, too.
Say you make a deal with your employees: Sell 100 tickets to the conference and we’ll take you to Las Vegas.
It’s a great promise. And it serves its initial purpose of motivating them. But you have to clearly articulate the deal — and put it in writing. (Are those fully paid tickets? What about cancellations? How many days? What kind of hotel? Who pays the minibar? And so on.)
If you don’t do that, the original incentive — which was meant to produce sales and increase morale — could actually backfire.
So when it comes time to make an agreement, here are four things a good contract should include:
- A clear explanation as to why the deal — as agreed to — is fair, along with the principles of fairness that govern the deal.
- Clear and detailed examples of who gets how much for doing what.
- Contingencies for when things change — as they inevitably will. A well-written contract should serve as a very useful tool to make any adjustments that are necessary. (Assuming, that is, both parties are still operating in good faith.)
- A clear description of what would terminate the agreement.
Make fair deals — and document them in writing. And remember that the purpose of a contract should never be to enforce an unfair deal…but to remind you of how and in what specific ways you thought the deal was fair in the beginning.
Wow — thanks Mark. You’ve certainly changed my perception of contracts! And if I ever need to write one, I’ll be sure to review your key points.
For Markets & Money
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