By definition, a contract is a legally binding agreement formed between at least two parties that acts as legal proof of a transaction. Even though oral contracts are binding, it is good business practice to have all contracts in writing. A written contract can bring clarity. It’s also easier and far less expensive to prove agreed upon terms if a disagreement arises with a written contract than with an oral contract. There are many types of business contracts, including sales, employee, lease, subcontracting, franchise, purchase, and confidentiality contracts. Whichever the case, contracts are an important aspect of any business venture.
Being able to competently negotiate a contract is key to a successful outcome for your business. Keep the following in mind the next time you have to negotiate a contract.
- Be ready for a lengthy discussion. Negotiations are discussions aimed at reaching an agreement, so expect the negotiation to go back and forth. It would be extremely rare for both parties to agree on all terms right away.
- Know your product. Whether you are the buyer or the seller, ensure that you know as much as possible about the product or service that is the subject of negotiations. You should appear knowledgeable in the eyes of the other party.
- Set realistic goals. Although you want to get the best deal, keep in mind that you need to be realistic. Have a target price as well as a solid first offer in mind before you start negotiations. The first offer will set the stage for the upcoming discussions.
- Know your value. As you settle into the back and forth, remind yourself of what in your product or service adds value. That value can be added to the negotiation package.
- Don’t just listen, watch. If you are in the same room, you can watch body cues—movements or facial reactions—for clues as to the other party’s position.
- Be ready to walk away. Even though you want to get the contract signed on the dotted line, be prepared to defer or even walk away from the table if the terms are not satisfactory.
- Understand both sides. You know what you want from the deal—what about the other side? If you can anticipate what the other party deems as acceptable, you can get the deal done faster. What you may see as value the other party may not, or vice versa.
- Do your research. A great deal of information is available online—research the company/person you are in talks with to gain a better understanding of their company values, vision, past projects, and partners.
Perhaps the most common contract that business owners encounter at some point is a commercial lease. Generally an offer to lease document is presented at the outset and, after negotiations, the final lease that is agreed upon is signed. No two leases are exactly alike, but the following terms are present in most lease agreements.
- Lease Term: The lease term may be fixed (yearly lease) or renewable (for example, month to month). You may have renewal options included in this section.
- Rent: This figure is generally based on the size or square footage of the space, but the final rent calculation could factor in other aspects as well.
- Space and Services: Determine whether services such as parking, snow removal, landscaping, security, or cleaning will be included in the rent or added as an additional cost.
- Operational Restrictions: Review these restrictions to ensure there are no limitations that could affect the growth of your business.
- Repairs: Determine which party is responsible for the cost and execution of repairs.
- Leasehold improvements: Be aware of who owns what assets in the space.
- Subletting: Determine whether you are able to sublease the space or not, and if so, what the restrictions are.
- Insurance details: Determine whose insurance is responsible for each asset and who will be liable for anything not covered.
- Taxes: Determine which party is responsible for paying taxes such as property or municipal tax.
- Utilities: Determine which party is responsible for the cost of utilities such as phone, electricity, and sewer.
It is important to ensure that the wording of a contract is precise and clear, and not open to interpretation or dispute. Take the time to carefully read and understand what is included in your lease. Have it reviewed by a professional, such as a lawyer or accountant. And most importantly, always get it in writing.