Business contracts are important for your small business because they protect you and your business partners, suppliers, buyers, or clients. A good business contract helps make sure that both sides of a business deal have their rights protected: the seller gets paid and the buyer gets what was promised. Legal contracts between a business and a buyer are the foundation for everyday economic life. When you have a good business contract, you can feel more confident about doing business and you can give your customers peace of mind that their expectations will be met and their rights will be protected.
We talked with some business and legal experts on how to make contracts for businesses that will be more effective. If you need to get better at working with business contracts, this advice will help you.
Why You Need a Business Contract
Many small business owners get started by doing business in a rather casual, informal way. Maybe you started your business as a side hustle or just doing a few projects for friends and neighbors, or maybe you started your business out of your home and didn’t realize it would take off and become so “big” so soon. Thinking about business contracts is not always top of mind for new entrepreneurs, but if you want to make serious money from your business, you need to get serious about business contracts.
Baron Christopher Hanson is a business turnaround and growth strategy consultant and owner of RedBaron Consulting LLC. He says that having a business contract is essential for doing business the right way.
“Business contracts are written communications that enable safer transactions,” Baron said. “I often explain to clients that doing business without a contract is not even business at all, it's complete foolishness. Typically, contracts allow either party involved in any transaction to perform work and get paid whilst reducing as much risk or blowback from the working relationship as possible. Contracts also carry with them a legal weight or pressure to perform so that more costly consequences do not result. Contracts help spell out exactly what's supposed to happen, so all parties included in the agreement can perform accordingly and professionally and sustainably.”
Without a contract, you might not have clear expectations for what is supposed to be delivered to a client or buyer, how much is supposed to be paid or what the payment terms are supposed to be. It’s not good enough to just take people’s word for it or do deals with a handshake. A business contract can put things in writing so that both sides of the deal are protected: the customer gets what they asked for, and your business gets paid as promised.
How to Create Bulletproof Legal Business Contracts
Consider Using an Attorney
You can use a business contract template if you want to start with a simple contract. But if your business needs are more complex, or if you’re doing larger-value deals, you might want to consult with an attorney to review your business contract or write a customized contract that is specific to your business and industry.
Baron suggests that you "....might have two different attorneys or separate law firms read and make recommendations on your entire suite of contracts or transactional documents. Akin to asking multiple medical doctors for opinions after any serious prognosis, lawyers can interpret and sense legal vulnerabilities differently. Ultimately, do whatever it takes for your business or company to come full-circle legally. The goal is to find yourself free of any contractual holes in your armor, and a routine review of your business and invoicing documents is the best methodology to remain bulletproof legally."
Include Your Critical Needs
Rishi Sehgal is an attorney and Special Corporate Counsel with Romano Law in New York City. He describes the process of writing a business contract as an exercise in thinking ahead and identifying the “must-haves” for a successful, collaborative business relationship.
“Start by identifying the most critical needs you have from the other party,” Rishi said. “You are working with them because you want to collaborate, and it will be important for you to think through what you need from them and what you need to deliver to them for both sides to succeed. Make sure that the timelines you agree to work for you so that you can avoid friction once you are up and running. Your counsel should be advising you on areas of legal risk and how to best address those, but you ultimately know what promises you can deliver on and the contract should reflect those.”
Think Through All Possibilities
A good business contract should also be as specific as possible. Try to anticipate possible problems or risks that you want to avoid. Think through the “what ifs” of your particular business and try to learn from previous situations. Did you have a customer fail to pay you? Did you have a disagreement about scope of work or a dispute about quality standards? You can include these considerations in your contract.
“The best business contracts are clear and detailed,” said Justin Meyer, an attorney with Rosenthal Meyer, PLLC, who practices in Florida, New Jersey and New York. “Don't worry about it being too long; what is important is covering as many eventualities as possible. Be as clear as possible as well. At the end of the day, the strongest contracts are the least ambiguous.”
Jacob Sapochnick of Sapochnik Law Firm backs this up: "You should be very clear in everything that you want to be included in your contract. Vague information that is presented in business contracts can cause a lot of legal issues that anyone wouldn't want."
Change Your Business Contract If Needed
As your business grows and changes, you might need to change your business contract, too. If you’re starting to expand into new markets, serving a different industry or type of client, starting to make bigger transactions or otherwise changing the way your business operates, you might want to revise your contract language. Baron recommends working with an attorney on a regular basis to review and update your business contract language.
“In my consultative experience, what's most important for business owners to remember is that their contracts and invoices can mature, be written better, become tighter or perhaps evolve as the business relationship evolves,” said Baron. “The secret is to have your executives and attorney work closely together a few times each year to review any testy customer or transactional tendencies and to improve your overall contractual language across the board or granularly.”
The bigger the business, the more complex the contracts might become. Be prepared to adjust and adapt your business contract language to stay ahead of the more complex risks that you might face as a business owner. Ideally, a business contract is a way of clarifying expectations and providing confidence to both sides of a business deal. Businesses of all sizes should be proactive about using business contract language to protect themselves and to support their customers. With a good business contract, you can do business with greater efficiency, anticipate challenges before they happen and take things off your “worry list” as an entrepreneur.