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 Award-winning business author and broadcaster

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  • Writer's pictureAudrey Tang

Guest Article: Brad Krause - the importance of contracts when starting a business

Updated: Jul 25, 2022

A strong business owner knows how to create, understand, and negotiate contracts, which are vital to any business. They can be tricky, however. This beginner’s guide will help you understand why contracts are essential, provide helpful tools to make things easier, and give tips on creating and negotiating contracts.

Non-Negotiable Asset: Why Contracts are Vital

As Hanover Insurance Group explains, having well-written contracts is a great risk management technique. It helps avoid misunderstandings that can lead to legal disputes. Contracts give you something to refer back to if problems should arise. If one side isn’t fulfilling their end, it will help you establish what happens next, be it improvement, severance, or anything in-between.

Contracts are binding and legally enforceable, even if it’s a very basic document outlining expectations, deadlines, purchases, and other relevant information. This protects you and the other party from delays in problem-solving; if you’ve established that missing deadlines calls for a $50 late fee, there’s no dispute later. A contract shields all parties and keeps business on track.

Stock Your Toolbox: Helpful Resources

Though creating a contract may seem intimidating, there are plenty of resources that can make the process painless. Some prefer to enlist the help of a lawyer who can help draft the right contract without any loopholes or undesirable terms. They can help you understand exactly what you should include and why, potentially coming up with ideas you hadn’t even considered.

Whether you decide to work with a lawyer or plan to draft the contract yourself, there are online tools to help. Many websites offer templates to get you started and come in various forms like PDFs, which are probably the most popular. After the contract is written, you may need to make changes. Rather than rewriting the entire document, you can edit a PDF to make comments, leave sticky notes, and highlight important information.

But How? Tips for Drafting Contracts

Start by using a legal terminology guide to help you understand the language used in contract writing. According to Law Insider, you should next use a simple contract template to give your document a strong foundation. The first paragraph should include the full legal names of all parties involved, as well as the official name of the business(es). Establish nicknames for each. It makes the rest of the writing process much easier while still being clear. For example, Stephanie Lauren Williams may be referred to as SLW.

Create an outline of the contract by listing the topics to be covered in some kind of logical order. Detail these topics with aspects like compensation, pricing agreements, dispute resolution, payment terms and requirements, and rights and obligations. Even a bulleted list can help you establish your expectations. Highlight your most pressing items and/or those you have questions on and make notes to bring to negotiations.

Speak Up: Tips for Negotiating Contracts

Perhaps the most important negotiation tip is to take your time. Rushed contracts can create major problems, so don’t be afraid to slow things down if they feel like they’re moving too quickly. Both parties should outline their priorities from the start, comparing each other’s goals and values.

Consider your needs versus your wants; what are you unwilling to budge on and what’s open for adjustments? Still, it’s better not to make the first concession; stand strong from the start. Go over risks and liabilities to cover what could go wrong and how the problem(s) would be addressed. If things get heated or you just aren’t communicating well together, hire a mediator who can help navigate the conversation productively.

The fact is, you can’t run a business without contracts. As a novice, you need to understand how and why they are so crucial.

Author: Brad Krause

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