Every aspect of an ongoing business concern is governed by some form of contract. Real estate terms are controlled by leases and deeds. Employment arrangements are established by agreement. Inventory and accounts receivable provisions are dictated by vendor and client contracts.

Given the significant impact that contracts have on small businesses, it is risky that most owners execute such documents without substantive attention, comment or revision. Most often, businesses enter into binding obligations without any real understanding of vital contract terms any input into how their companies assume risk of loss and liability. Of course, this problem can be avoided. Several key matters should be recognized when entering into any contractual agreement.

Every contract clause is negotiable. Business owners are often intimidated by opposing parties and counsel into thinking that certain provisions are absolute. However, determining the final reading of a contract is simply a matter of leverage and debate that should not be settled until both sides are comfortable with the terms. Even preprinted forms and boilerplate terms are negotiable.

Clearly, certain portions of an agreement are more vital to each party than others, and compromise is a vital element of any transaction. Thus, is important for each owner to decide in advance which items are essential and which can be traded away. Negotiating everything means that business owners are permitted and must discuss, argue, deliberate, and ultimately agree upon all terms of the agreement to achieve the maximum gain and minimum risk.

2. Provide the First Draft

You always want to volunteer to draft the first draft of a contract. Doing so can give you a tremendous advantage in the negotiations. This allows you to structure the deal initially on your own wish list with terms most beneficial to you.

Moreover, from a legal cost perspective, drafting the first draft often is more cost effective than responding to the other lawyer's one-sided draft.


3. Pay Attention to Boilerplate Terms

Boilerplate terms are an essential part of any agreement and affect the rights under the agreement as much as any other terms. These terms can be negotiated in the same manner as all other terms in your agreement.

Key boilerplate terms to focus on include:

• Ensuring that amendments to the agreement can only be made by a signed writing;
• Having a governing law provision;
• Dispute resolution provisions including arbitration and mediation isses;
• Preventing unauthorized assignability of rights or duties under the contract; and
• Noting that the contract includes all representations, warranties and agreements of the parties (the “integration” clause)

4. General Considerations

• An effective contract should always be clear, specific, and focused;
• Sentences should be short to avoid unnecessary complexity and ambiguity.
• Make sure that the correct legal person is named as party to the contract - business owners should not be referenced in contracts entered into by LLCs;
• Define important terms;
• Anticipate litigation by including sections regarding venue, choice of law, and attorney fees;
• Pages should be numbered and preferably initialled by both parties - avoid the appearance that pages could have been added after the agreement was signed;
• As with any business writing, proofread very carefully.

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