Volume 2 Issue 5-- September/October 1998
Get it in writing. Simple advice, but sound. Is it essential to reduce all agreements to writing? No so long as you never have a problem with a customer. If you believe, however, that you will never have a problem with any customer, you are either very new to the business world, naive, or both.
Many cultures, particularly more homogeneous societies (such as the Japanese), in which nearly everyone agrees that things must be done a certain way, put less value on reducing understandings to writing. Americans are just the opposite. Our business dynamics are constantly changing, and we have a culture in which people from diverse backgrounds may be entering into contracts with each other over the Internet.
Legally, many contracts are not required to be in writing, although some types of contracts must be in writing to be enforced legally. If, however, people with divergent interests or backgrounds are dealing with each other, there is an increased chance of misunderstanding. Reducing the arrangement to writing gives all parties a chance to ponder the arrangement.
Preparing a contract is much more than filling in blanks since alternatives have to be weighed. I regularly tell clients that the process of preparing the contract is more important than the contract itself. Often before a contract to buy a business can be written, it is necessary to review a checklist of points to consider. This is important because, otherwise, a buyer of a business may not think about asking for prior performance records, tax records, equipment warranties, and the like.
The process of pondering and checking what should go into a contract may, in some cases, alleviate the need for a contract altogether. For example, considering all of the relevant factors may show that it is not advisable to buy a particular business or asset, now. In some situations, reviewing a business purchase checklist may cause a buyer to realize that he shouldnt rely on the Sellers accountants figures.
Yes, it is a good idea to get it in writing, but dont use just any old document. Business people should use
checklists and carefully structured documents. An off-the-shelf contract from a bookstore, or one used in a prior deal is sometimes better than no documentation, but sometimes its worse. Blindly using any business form or sample contract, designed with a different objective in mind, can lead to chaos.
Most business people would not go to a podiatrist for eye surgery, yet, surprisingly, I have seen businesses purchased using a standard residential home sales agreement. In one case, a restaurant leased space in an office building using the standard office lease which provided for no air conditioning after 6:00 P.M.!
The use of written agreements will not eliminate all disputes, especially if the underlying document is seriously flawed. Recently, before consulting with Newland & Associates, a business-client signed a contract to buy the land it was renting. The tenant-buyer assumed, but the contract did not state, that the landlord-seller would install a sewage drainage system on the property. After the agreement was signed and a deposit was paid, a dispute erupted over who would install the drainage system.
But, wait!, you say, With the advent of electronic communications, havent we moved to a new playing field? Havent these inventions obliterated the need for the older disciplines described above? In short, No!
A recent case involved two young executives who formed their own business, Newmarket, Inc. to assist professionals with marketing. Initially, Newmarket did not use written contracts. Then, one client, Dr. Pain, began questioning the services he had received, and tried to stop payment to Newmarket, payment he had verbally authorized on his credit card months earlier.
The credit card company asked Newmarket for confirmation of the charges. Unfortunately for Newmarket, Dr. Pain had not signed for the charges, and there was no written contract between Newmarket and Dr. Pain.
Surprisingly, many businesses ignore or forget the basics discussed in this Newsletter. Perhaps, you wont. If you need assistance with contracts, forms, or similar business documents, call Newland & Associates. We have an excellent business purchase checklist that you may find helpful. Give
us a call.
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