How to Negotiate a Contract to Take Advantage of the Opportunities Presented by These Challenging Ti
It has been a while since I last offered my thoughts about how best to use the legal system to your business advantage. To be honest, after writing about bankruptcy and reducing payroll costs, I had little to offer that appeared useful during these challenging times. Me with no clue; go figure. While challenges remain, my practice is revealing opportunities for well positioned start-ups and established small businesses based upon substantial reductions in the cost of goods sold.
It is true that credit is a problem forcing clients to seek funding from private investors. However, the balance still favors action that can allow you to enter or capture a market while others sit and "wait for Godot." With careful thought, bad times are a good time to make money. Labor is cheap. Real estate is cheap. Raw materials are cheap. IT is cheap. We lawyers and accountants have held out, but are getting cheaper.
This brings me to the subject of negotiating business contracts including investor and partner relationships. Years ago, one of my clients shared this witticism which struck a chord, I think "B sharp", "The only thing worse than no deal is a bad deal." I came to transaction work from a litigation background and can testify to this quip's accuracy. Some of my new clients pay me a lot to remedy or unwind a poorly conceptualized contract, transaction, or business venture. It is smarter, and in the long run much cheaper, to correctly negotiate, structure, and paper the deal at the outset when the parties and relationship structure have some flexibility.
I offer four suggestions for contract negotiation which may sound familiar, but bear reconsideration and explanation.
First, study (a) the market and economic sector; (b) the enterprise economics and resource requirements; (c) required management skills; and (d) the development, marketing, and distribution challenges which must be overcome should you actually reach agreement. Then realistically evaluate your risks and how to price for them in the deal. A good idea is not enough for a successful business.
Second, identity your essential needs, wants, and values. Then add a few more essentials, which may give you a cushion for recovery from mistakes. Understanding the essentials enhances both the likelihood of success and the quality of negotiation presentations.
Third, initially use your lawyer for guidance and deal directly with the other party. You and the other party often have much to learn about each other besides the terms of the contract. We find that when well thought out and executed, substantial contact between the parties allows both sides to study not only each other's objectives, but, just as importantly, their business philosophy, personality, methods, corporate culture, and integrity. The process should identify both compatibilities and sources for conflict and dysfunction, which should not be ignored.
Finally, structure the discussions either formally or informally. A formal structure generally employs the exchange of a proposed letter of intent ("LOI"), which addresses key issues in a definitive manner that is short of a detailed contract. A more informal process frames the discussions with a list of "points for agreement." The list identifies the key topics that each side believes must be addressed for the deal to work. During the discussions, the parties record their position, agreements, disagreements, concerns, and reasoning. Each side can then review the list and decide whether and how to proceed, including offering acceptable proposals for addressing the other party's concerns. When the LOI is ratified or the points of agreement are satisfactorily resolved, the transaction is turned over to the lawyers for formal documentation.
We frequently work with clients to craft points of agreement topical outlines for their discussions or proposed letters of intent for negotiation. It is our experience that this preliminary process can be effectively used by our clients to determine whether they can secure a good deal or are better off with no deal.