Tell me if this story sounds familiar.
You’re 13 years old. It’s Monday morning, and you’re getting ready to head to school. As you say goodbye to your mom/dad, they give you a warning.
“Your room is a mess. I want you to pick up when you get home from school. And it better be clean before I get home.”
That afternoon, you get home from school and you’ve got at least an hour before they actually get home. ‘I’ve got plenty of time to clean up,’ you think. ‘I’ll watch TV for a little, then clean my room before they get home.’ An hour later, Denzel Washington and the Titans are halfway through an undefeated season when you hear a key hit the door. Game Over.
Even if you’ve never had this exact experience, you know the feeling. You put something off until the last minute. Then suddenly the moment arrives when you needed to have that thing done, and you never took care of it. Your stomach drops as your mind races for a last minute solution. But it’s too late; you’re screwed.
This is the situation people eventually find themselves in when they choose to do business without written contracts. Entering into a business agreement without a written contract is like playing Russian Roulette with your business. Each time you pull the trigger on a deal, chances are everything will work out alright. But if you press your luck enough times, eventually it will run out. That’s when things will get ugly and there’s no telling how bad they might get.
That’s why I want to remind all of you entrepreneurs of something you hopefully already know. No matter who you’re working with or how small the deal is, always get it in ink!
What’s the Worst that Could Happen?
If you know some contract law, you probably know that verbal contracts are legally enforceable. So if two people come to a verbal agreement and one person doesn’t follow through on their obligations, the other can take them to court. The problem is proving the substance of that agreement can be next to impossible if it is not in writing. The most common issue that arises when there is no written contract occurs when one person refuses to pay the other. But failing to get it in ink can have much worse consequences than missing a pay day.
Here’s a real life example of how bad things can get. A friend of mine started a business along with a business partner. They formed an LLC, but never took the time to put together a written operating agreement. For those who don’t know, an operating agreement is a contract between the members (i.e. owners) of an LLC. It states how the business will be run and managed, and how different situations will be handled.
Things worked out great, until… A few years after starting the business, my friend got a call from a random bank. They had some surprising news. My friend’s business partner had used the business’s assets as collateral on a personal loan. Now the loan was past due, and the bank was ready to collect.
Naturally, my friend was pissed. They had never discussed the possibility of using the business’s assets to secure personal loans. However, there is no way my friend would have agreed to this use of the business’s assets without his knowledge. Unfortunately, because my friend did not have a written operating agreement, there was nothing to prove that their business partner had acted improperly. Part owners of an LLC are generally free to make unilateral decisions about the business, unless the operating agreement says otherwise.
To make a long story short, my friend lost the business and had to start all over again from scratch. This nightmare scenario perfectly illustrates the helpless position that business owners can find themselves in when something goes wrong and there’s no written contract.
How Written Contracts Benefit Your Business
Written contracts can serve many purposes. For example, they can make a business look more professional or serve as evidence in case you end up in court. I could go on and on listing the potential benefits. However, in my humble opinion the importance of written agreements really boils down to two things — setting clear expectations and managing risk.
Setting Expectations
Expectations play a critical role in every business relationship. The wisdom in the phrase “under promise and over deliver” comes from the recognition that those who exceed expectations earn the trust of others. And trust can be the difference between a customer choosing to work with you or a competitor.
One of the biggest problems with handshake agreements is that people often forget to address common what-ifs. For example, let’s say a videographer agrees to film and edit a music video for an artist. They verbally agree to a price, a date and time for a 3 hour shoot, and a completion date for the video. However, they don’t take the time to put it in writing.
The date for the shoot comes around, and the artist is two hours late. She thought they said 2pm instead of noon. The videographer wants to reschedule — there isn’t enough time to film all of the shots and she has a very specific vision. However, the artist wants to film what they can with the time remaining, rather than reschedule and have to push back the completion date. Now, after they’ve begun performing their obligations, they have to work through an issue that they disagree on. An issue they probably would have thought to address had they took the time to get it in ink.
Written contracts provide a clear understanding of what people can expect from one another. People often forget or misremember the details of a conversation. Written contracts provide clarity where there would otherwise be confusion. Additionally, the negotiation process provides time to think through potential issues like cancellations, and come to an agreement on how to handle them. As a result, both sides are more likely to meet each other’s expectations. In the process they begin to build trust, which is at the foundation of every successful ongoing business relationship.
Risk Management
There is no escaping all of the risks that come with starting a business. It is simply part of the territory. Business owners have to be willing to accept some level of risk if they are ever going to be successful. But, there are tools that entrepreneurs can use to manage the risks that come with owning a business. One of them is a written contract.
Written contracts are commonly used by businesses to allocate risk. In other words, they use contracts to state who is responsible for specific outcomes. For example, let’s say you were a fitness coach. It would be wise to have a written contract stating that your clients are ultimately responsible for their own outcomes. Otherwise someone may come asking for a refund when the workout you recommended doesn’t give them J-Lo’s body in one month. Or, let’s say you made and sold beauty supplies. If you didn’t have a written disclaimer, you’d be leaving yourself open to liability. If a customer claimed your product harmed them, a refund may be the least of your worries. And if people can purchase your products or services online, and your website doesn’t have a terms and conditions page… please see me after class.
As a business owner, you may feel like you don’t always have the time, money or energy to get it in ink. Especially if you are a new business owner and you don’t have a business partner. I get it. But you know what you really don’t have the time, money or energy for? Court. Take the time and get it right now, or run the risk of paying the price later.
Get it in Ink!
Look, I understand why someone might come to a verbal agreement and decide to skip the last step. I’ve done it myself. And because I’ve done it before, I know the excuses we make to justify why we didn’t get it in ink. ‘They’re like family.’ ‘I didn’t want to risk losing the deal by taking the time to write it down.’ ‘It was only for a couple hundred dollars.’ Our excuses might make us feel better, but I didn’t write this to make you feel better. I wrote this to encourage you to do better.
So here’s the truth. There is NO good reason not to get your agreement in writing. You want to protect your business? Build better relationships with customers and clients? Take your business to the next level? Get it in ink! And if you need help, I’m here for you.