The terms of many contracts can have a major influence on how beneficial arrangements end up being for a business. A contract can force a company to uphold specific terms, commit them to a long-term business relationship and lock them into pricing. Contracts also expose businesses to liability if they fail to uphold their promises to others. It is, therefore, crucial for those negotiating business contracts to prepare carefully ahead of time.
What steps should business owners and executives take before sitting down to negotiate with an employee, service provider, vendor or landlord?
Perform economic due diligence
Understanding what services, goods or labor are worth is crucial to the establishment of a mutually beneficial contract. Looking at what else is available on the open market can help owners and executives determine if the terms proposed are reasonable. Due diligence can involve looking carefully at what other professionals earn, what similar spaces are worth and what other vendors charge, as well as how those rates have changed in the last few years. Understanding the broader economy as it relates to the contract can make it easier to negotiate favorable terms.
Explore sources of liability
Parties signing contracts can integrate an assortment of different terms that protect them in a variety of circumstances depending on the type of contract. Perhaps a tenant wants to add a force mature clause to a lease in case the business fails due to economic changes. Maybe an employer worries about a worker competing against them by starting their own business or revealing trade secrets to a new employer later. Restrictive covenants can help protect against those circumstances. Identifying potential sources of liability can help executives and owners propose terms that protect them in as many situations as possible.
Consider the possibility of conflict
Even mutually-agreeable arrangements can sometimes fall apart due to disputes. Conflict about minor issues can end up damaging working relationships and making the continuation of a contract untenable. It may be necessary to include terms for terminating the contract and addressing potential future disputes. Requiring mediation or other forms of alternative dispute resolution before litigation can be a way to minimize the expense generated in a contract dispute scenario.
Having clear priorities and specific terms in mind before sitting down to negotiate a business contract can help prevent scenarios in which businesses end up locked into unfavorable terms. Those who have proper support when planning, negotiating and drafting contracts can optimize their protection while minimizing their exposure.