Like most entrepreneurs, I negotiate and sign a lot of contracts. And while I’m not a lawyer, I sometimes feel like one after as much time as I have spent with — and as much money I have paid to — attorneys over the past 15 years of running businesses.
But what interests me more than the legal mumbo jumbo (that’s a technical term, by the way) is how other entrepreneurs, business executives, and others approach the contract process. Very often I see a fixation on business terms in the contract negotiation process. This has the exercise backwards, however. The business terms should be hashed out before the lawyers get involved with legal language. Things that can be agreed upon easily in a conversation between two business people often becomes more complicated once the discussion takes place over what often seems like harsh legal language. Lawyers don’t get paid for eloquence or diplomacy (most of the time). Their role is to zealously protect the interests of their clients.
If the business terms get worked out before the contract review, then what is the purpose of haggling over the legal language? Shouldn’t it be pretty straightforward to just turn business terms into legal ones? While it seems like the answer should be yes, it’s not that simple. In part, that’s because most lawyers don’t spend enough time with the business side of the company to translate quickly and effectively between human language and lawyer language (for the record, I come from a family of lawyers so I feel like I can take a few potshots; plus, the amount of money I have paid lawyers over the years should give me some leeway for good-natured revenge).
Still, this language conversion isn’t the most important part of the contract process and it isn’t why contracts matter in business.
Contracts exist for when things go sour in a relationship. Think about it. How many times have you pulled out a contract to consult it when everything is going well? If your customer pays you on time, you don’t look at the contract. If your insurer covers your claim, you don’t look at the contract. If your provider gives you the service you expect, you don’t look at the contract.
You go to your file cabinet and pull out the contract when you’re angry or frustrated. You feel as if you have been wronged in some way. You want to know how you can get out of the deal. Or force payment. Or compel proper service.
The terms that matter most in a contract, then, are the ones that apply when things aren’t working. Too many entrepreneurs and business people focus in on exciting things like generating large amounts of revenue. Instead, they should be asking, “what happens if things don’t work out well?” What if the vendor doesn’t provide the service you expect? What happens when the client doesn’t pay? What happens if the business development agreement doesn’t create as much new business as both parties thought?
I’ll be honest with you: covering the worst case scenarios may be the most important part of business contract negotiations, but it’s also the part that sucks most. When everyone is feeling good about a project or venture, it’s tough to be the skunk in the room who wants to talk about failure. But it’s important. Think of business contracts as the work equivalent of a pre-nuptial agreement. You don’t want to talk about it when things are blissful, but you wish you had if things go south.
So the next time you’re negotiating a business agreement, don’t get blinded by the excitement of the upside. Focus instead on your downside risks and remedies. Someday you will be glad you did.