Many of my friends are small business owners, and I always tell them to make sure they get everything in writing. But I know it’s not as simple as it sounds. There are so many situations where a casual conversation can turn into a business arrangement. And even in more formal settings, it can be hard to insist on putting things in writing.
You may have a valid contract without a written agreement, but you don’t have any backup when your customer or client says you agreed to one thing, when you think the arrangement was something quite different. Without these agreements, you can end up doing extra work for free, not getting paid enough (or at all), and spending a lot of emotional energy dealing with the drama.
One of the reasons that small business contracts are thought to be difficult is that we tend to think a contract has to be 20 pages long with complicated legal terms. Although this may be exactly what you want for a large, important transaction, a valid contract can be far simpler.
As a practical matter, one of the main purposes of your contract is to manage expectations on both sides. If you have something in writing that says who is going to do what and when, the potential for misunderstandings goes way down. By doing so, there is a greater chance you will get exactly what you bargained for.
Here are the 5 things you must get in writing:
- Who. Identify who is making this agreement. You can use language like this: “This confirms that ____ and _____ have made the following agreement.” If you own a corporation, LLC or other formal business entity, make sure you make your agreements on behalf of the business, not yourself personally.
- What. What are you or the other party agreeing to do? Be specific – disagreements about the scope of work are one of the biggest reasons small business owners end up in disputes. For example, if you own a lawn care company, you might say “Our company will perform a one-time seasonal cleanup at 23 Elm Street the week of March 15th. The cleanup will consist of brush trimming, leaf removal, grass mowing, mulching, and weeding.”
- Payment. How much will be paid, and by whom? How will payment be made – cash, check, wire transfer?
- When. Be clear about when the product or service will be provided and when payment is due. If work won’t start until payment is received, say so.
- Potential problems. You can’t anticipate everything that might go wrong, but there are some issues that come up repeatedly. Including a sentence or two about your cancellation or returns policy can save you a lot of frustration. You might want to impose a penalty for late payment. If you are a lawn care company, you can plan for rain and include a phrase like “or as soon as weather permits.”
Putting things in writing can be as simple as sending an email laying out the terms of the transaction and asking the other side to confirm that they agree. Many small businesses do a lot of the same types of transactions, so to streamline processes you can work with a lawyer to develop a standard contract template that you can use for multiple transactions. Finally, to ensure you’re covered, it’s always a good idea to have a lawyer prepare or review all formal contracts.