Contract considerations
Dear Readers,
Small business owners typically wear multiple hats and often times represent themselves when entering into a contract. One reader, Daniel, who owns a home repair company that works with both individuals and, now provides services to a maintenance company, has asked what he should be looking out for when entering into a contractual agreement.
Josh: As tempting as it might be to reach an agreement with a handshake, it’s important you take the time to draft a contract and put in writing certain provisions that will give you and your business solid legal protection should the need arise. Don’t think it has to be complicated or long. Your contract can be simple and still be very effective. So, Pedro, what are the important factors of a contract that a small business owner should be mindful of?
Pedro: For many small businesses like Daniel’s, there is a need to create a professional services agreement that explicitly defines the relationship between the service provider and the other party. You should think about: defining who is responsible for what; who gets paid and how and when payment is made; how decisions get made and who makes them; how long the term is for. A Services Contract (also called an Agreement for Professional Services) lays out the terms and conditions under which you provide services and specifically spells out your responsibilities and liabilities. It also gives you flexibility in completing the services, lists the fees for the job (and additional fees if you encounter unforeseen circumstances), and sets limitations on your liability. What do you think Josh?
Josh: I agree with all of that. My advice is to read through the contract carefully and negotiate the terms. When presented with a contract, remember that it is just a starting point. You can negotiate the terms of nearly every agreement. Understand the purpose and scope of the contract, consider consulting an attorney if you are able, and ask for what you want. The top four things I would caution each business owner to look for in a contract are:
1. The “Who”: Be sure to include the names and addresses of any subsidiaries that may provide services too.
2. The “What”: It’s important to capture who’s responsible for what and who is liable if something doesn’t happen according to the contract.
3. The “Worst Case”: Consider what happens if something goes wrong. Explore ways to limit your liability. Also determine what types of remedies you need in the event of default by the other party.
4. The “Exit”: Consider including options to terminate the contract for cause and/or for convenience (without cause) if it is not working to your benefit.
5. The “Oops”: Depending on the nature and purpose of the contract, consider whether the parties need a minimum amount of insurance coverage for certain liabilities.
Thanks again for the great question, Daniel, and good luck with your expanding business. We’d love to hear from you. We are offering a $100 to the reader whose question is selected next. Please submit your business questions to together@lead.bank.
