Seeing the Forest for the Trees (Part Two)

Don’t Lose Sight of the Single Most Critical Consideration in All Key Business Contracts

Follow-Up to Prior Post

This post is a follow-up to our previous post (Seeing the Forest for the Trees — DunhamLaw (dunhampllc.com)), where we shared our observation that clients routinely “miss seeing the forest for the trees” by negotiating a detailed contract but doing so with the “wrong” other party. We explained how - even if you have a well-drafted contract - you’re going to have a regrettable mess on your hands if you’re entering into a key contract with such a “wrong” person or business. We said there were two types of “wrong” persons or businesses with whom to enter key business contracts: one is obvious and the other not so much.

Our prior post covered the more obviously wrong party, which - generally speaking - is someone that (1) is not qualified to do the job, (2) has material external negative influences in their life (e.g., financial, relationship or mental difficulties) that hinder their ability to do a good job, and/or (3) is just not honest, ethical and cooperative. We gave ways in which you could identify and protect yourself from this type of potential contract partner.

This post covers the less obviously “wrong” other party to a key business contract.

The Less Obviously “Wrong” (and Perhaps Even More Costly) Other Party

The less obviously “wrong” party to a contract is someone who is often good at what they do and often a good person. They very well might be the “right” other party for someone’s contract - just not your key business contract.

Too often over my 20+ years representing entrepreneurs in business transactions, I’ve seen clients enter into a critical business contract with someone who just kind of fell in their lap. They were friends (or friends of friends) or former colleagues or family or key customers or vendors or someone with a common interest. Entering into a contract with them just seemed to make sense or felt right. However, when it came down to it, this person or business was not strategically identified as the ideal, critical, missing piece to my client’s success and, not surprisingly, they didn’t provide this missing piece.

Whether it is starting a business or expanding into another market, you need to first ask yourself what skills are necessary to do this “successfully” (which, of course, means a little something different for all of us). This could mean, for example, a technical skill, certain level of soft skills, industry clout and contacts, capital, experience growing a company along your desired trajectory, etc.

You then need to determine if you and/or the rest of your existing team have the requisite skill. If you do, it typically makes little sense to give away what is required under a key business contract for simply a duplication of an existing skill. For example, the best partnerships I’ve typically seen over the years have been when you combine someone who has the critical technical skill with someone who has high-level sales and people skills (including, increasingly, with the client’s own staff). In that situation, 1 + 1 = 3. Conversely, when you simply combine a couple owners who think the same, look at issues the same, and have the same exact skillset, you still have a major void in the required critical skills yet have diluted ownership so there’s less upside for the current owners and less to give to the individual(s) you need to attract. In that situation, 1 + 1 = <2.

If the required skill IS missing, you then need to ask yourself what the ideal person or business to provide this missing skill would look like. For example, do they need to have a certain education level, number of years of industry experience, good people skills vs. technical skills, deep pocketbooks, public company expertise, etc.?

Once you have a clearer picture of what you need, then ask yourself if the person or business with whom you’re currently thinking about entering into this key business contract meets these requirements. Often the person or business who has naturally fallen into your lap isn’t best (or even adequately) suited to deliver this. And, importantly, when it does fail, the preexisting personal relationship (and other in-common relationships) can be permanently damaged, too.

While the successful business owners I’ve seen over the years may be loyal and look to provide those around them with opportunities, they won’t do so at the overall expense of their business’s success. Once they identify the critical missing piece to their desired success, they will strategically identify and recruit the absolute best person or business they can convince - not the most convenient one - to fill this void.

Turning the “Right” Other Party Into the “Wrong” Other Party by Making a Bad Deal

Even if you identify a person or business who appears to be the “right” other party to your key business contract, you can turn them into the “wrong” other party by making a bad deal with them. I mentioned above that my most successful clients have been very strategic about identifying and filling critical needs. Well, just as importantly, they’ve been very thoughtful when establishing the overall level of consideration to be paid for this and how and when it’s paid.

I cannot tell you the number of times I’ve had clients come to me to form a new business venture, where they’ve agreed upon an equal ownership split among the founders or joint venturers. This is despite the fact that it really doesn’t reflect the overall value and importance that each is bringing to the deal (and is expected to continue to provide). It just seems fair to them and/or is easier than having an uncomfortable negotiation. This can be one of the most-costly mistakes you’ll ever make. Doing so can dilute the deal. It can create more disputes and more difficulty in resolving these disputes. It can cause resentment among the parties - both in good times and especially in bad.

Take the time to really consider what value each party is bringing. Do research on what other individuals and businesses are being compensated for this and how and when this consideration is being paid. Point to your objective findings when explaining why you believe your proposed consideration is fair and right.

Related to this, also ask yourself if you even need to enter into a KEY or CRITICAL business contract (vs. a more immaterial contract) for this missing skill. Do you really need to provide someone with a piece of the equity or buy a business and pay for the goodwill or enter into a joint venture to fill the need? Or is it something you can realistically (and much more cheaply) fill by hiring/training an employee or consultant? And while it might be initially more attractive to give a piece of equity than pay for it early on when cash is tight, give adequate consideration to how much that equity might end up costing you. Perhaps there are better ways to save cash that can be used to pay for this skill instead of equity.

Consider if You’re the “Wrong” Other Party to a Key Business Contract

Finally, sometimes my clients need to consider if THEY could be the “wrong” other party. What do I mean by this? Often, entrepreneurs are successful because they are driven, hard-charging, tenacious, won’t take “no” for an answer. Given the many hurdles you face in the lifetime of a business, these qualities are important. However, by themselves, these qualities can make it difficult to strike and maintain key business contracts that require a lot of cooperation, such as partnerships and joint ventures.

Even if entering into a critical agreement with a “right” other party would - on paper at least - add value to your venture, be realistic about your personality and approach and those of the other party. If it’s different, that’s often a good thing. But, in my experience, both parties better have a high-level of respect and appreciation for the other’s differences and be willing and able to invest the extra time and energy necessary to work through the disagreements. Otherwise, you’re bound to find yourself in disputes and litigation that can more than negate any benefit the contractual relationship ever provided. That is, you would have been better off (1) just doing it by yourself from the outset, (2) entering into an agreement with someone less talented but with a more agreeable personality and approach, or (3) entering into an agreement with a scope that was narrow enough that its termination would have less of an impact on the business.

Dunham Law

Dunham Law can help protect you with your key business contracts through practical advice and clear, well-considered drafting. Contact Brian Dunham @ 859.479.3961 to learn more.

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