In simple terms a contract is an agreement between two parties. We enter into and complete contracts every day, usually without a second thought. Many of these contracts are verbal.
A contract has legal force¬ and therefore needs to be approached with some care and attention. The world of business is littered with the shattered finances of many people who have unwittingly entered into a contract without fully understanding the risks associated with it.
The name of the game is to minimise the risk. To minimise the risk means that you need to understand what will happen if the arrangement or deal does not turn out the way you would like. This is particularly important where you need to enter a contract in circumstances where you have no control over the terms of the contract. A good example of this is a software license, and another is the mortgage you sign when you borrow money to buy a house or to fund your business.
There are of course many instances when you have the opportunity to influence the content of the contract.
How do you put yourself into a good position so that you get what you want at a price you are happy to pay, and still protect the relationship with the other party? Remembering of course that you may need an ongoing and harmonious relationship after the contract is executed and completed.
Take the time to think about exactly what you hope to achieve from a negotiation right from the beginning. Also think about what would be valuable, but not essential in the agreement. Understand what you bring to the table. There are skills and a level of knowledge that you will bring to the negotiations. You may need some help with other aspects. Consider where you can access support and where you can find the resources that will help you. Weigh up the value of having a professional on your team.
You may have noticed that we have focused firstly on ourselves and the things we can control.
The second element of preparation is to try to understand what drives the other side, what they stand for, what they may want and how they work. You cannot control what they may think or do, but equally they cannot control what you may think or do.
Plan your strategy. Some negotiations only need a little planning, and others should be approached with some detail. Your ability to respond in a coherent and timely manner will often dictate whether or not you obtain a satisfactory outcome.
In a typical buy-sell contract the buyer will usually specify their requirements and the seller will ask questions to clarify the specification and discover if a solution can be offered. There will be some discussion to see if there are barriers to an immediate agreement or whether negotiations will be protracted.
Where both sides have entered the negotiations with a clear strategy and a clear understanding of what they hope to achieve, it is likely that they will quickly understand where they have common ground and the focus can switch to the areas where one or both sides can make concessions. You should also be prepared to end negotiations when it is clear that no agreement can be reached. It is not wise to make concessions beyond your original intention simply to finalise the negotiation.
The progress and the outcome of negotiations should be documented at the time, to ensure that the recollections of both sides are accurate. This is also the time for both sides to clearly summarise their understanding of what was agreed. This will ensure costly delays are avoided when it comes to preparing a contract, an order or a letter of engagement.
Effective negotiations that leave both sides happy with the result are the foundation for the future of your business relationships. In an ideal world negotiations and a handshake should be enough. But the reality is different.
Even with the best intentions people will recall a conversation or an agreement with a different emphasis or viewpoint. Lengthy and costly court action will often follow and that does nothing other than to funnel your money to your lawyer.
While there is a cost to formalise an agreement with a properly prepared legal document, the initial cost will far outweigh the cost of protracted legal action at a later date. It will also ensure that all the issues that will invariably arise are discussed at a time when there is no animosity.