The next tip for those who own, or want to own, a small business: make sure you have written contracts WITH CLEAR TERMS.
I had a case a few years back where my client sold her home health business to a “friend”. The two friends decided not to get a lawyer and instead used a form contract for the sale of the business. Of course, a dispute arose after the contract was signed. The buyer had made a down payment on the purchase of the business and then was supposed to make installment payments to pay off the balance. But, after running the business for a short time, the buyer decided that she had not received what she expected and therefore she stopped making payments. The dispute ended up in a lawsuit and the case went to arbitration. The arbitrator ultimately decided that no one won the case because there was a “mutual mistake” involved, meaning the parties never really agreed on the terms of the agreement. This was a very rare result because usually in a lawsuit someone wins. In the end, both sides lost out, the seller never got her money, and the buyer did not get the business she expected.
The above situation illustrates the importance of having written contracts that lay out the true terms of the contract. When a contract ends up in court, the judge will look to the “four corners” of the contract, meaning only what it says in the contract, not some verbal side deal that was never written down. The purpose of a contract is to deal with all potential issues that could arise. You want to make sure that your written contracts “say what you mean”. DO NOT just sign a business contract, read it carefully (or have an attorney review it for you).
And, the days of a “handshake deal” do not exist anymore. I was doing legal research recently and read a quote from a case that I thought summed up this issue well and all business owners would be wise to remember:
“An agreement that is based on trust and is not documented is fine as long as there is plenty of money and as long as there are no problems. The purpose of legal agreements is to define, in advance, who has superior rights when there are not enough assets to go around.”
The information contained herein is general information not legal advice, and does NOT establish an attorney-client relationship with Lori Brown or Hymson Goldstein & Pantiliat.
 In re Moye, Case No: 07-37770 (Bankr. S.D. Tex., 2008).
Many of my clients are individuals who own small businesses or are starting a small business. Some of my clients have been sued and need an attorney to defend them in an action. Other clients need an attorney to file a lawsuit, usually to collect money they are owed. But, the best case scenario for a client is when the client has the ability to call me before they get served with a lawsuit or get into a situation where they want to file a lawsuit. The reason this is the “best case scenario” is because then the client can hopefully avoid a lawsuit altogether. Lawsuits are costly endeavors, in both money and time. Keeping this in mind, I decided to write a series of monthly letters for those individuals out there who want to do their best to stay out of court and save money in 2013!
Over the next year, I will be sending out my monthly letter which will include a business/legal tip for those who own, or want to own, a small business. A small business owner understandably wants to “focus on business” and not have to deal with issues that are outside their area of expertise or what can be seen as administrative-type work. But, I have seen too many small business owners who wait until there’s a serious problem before calling for legal help. Maybe they don’t want to “waste time” or money having an attorney involved. For example, most small businesses don’t have an employee handbook. What happens when you want to fire a “problem” employee? Or what about a contract you signed – just so you could “get the job done”, but you never spent the time to read the contract until it was too late?
As anyone who has started a business knows, there is so much more to a business than just a “great idea”. You need to have all the nuts and bolts to make your business successful.