“I prefer to do business on a handshake, rather than a written contract. What’s wrong with that?”

While some verbal contracts or handshake agreements might be legal, other contracts require written agreements to be enforced.  Some of these include transfer of real estate, sale of goods worth $500 or more, contracts that cannot be performed within one year, and promises to answer for another’s debt.

When working with family and friends, always put agreements in writing to prevent misunderstandings, hard feelings and awkward Thanksgiving dinners.

Written agreements also:

  • Lead to successful relationships by outlining obligations of both parties. There is a clear understanding of what you will do for the customer and what (and when) you will be paid.
  • Are valuable when selling your business, showing commitments on the part of your customers.
  • Ensure ongoing revenues will continue to cover one-time or set-up costs that are initially waived.
  • Help you more accurately predict future cash flow when planning for growth.
  • Help cement long-term relationships; and it’s more profitable to work with current customers than to generate new business.

You might hesitate to use contracts because you don’t want to pay attorneys. Draft your own initial agreement, making sure that you have clearly defined everyone’s responsibilities. Then have a lawyer review it to make sure it will stand up in court. You may pay a lawyer as little as a few hundred dollars to review an agreement but litigation over a contract gone wrong can reach well into the 5 or 6 figures! Use layman’s terms as much as possible. This allows for minor modifications and makes the agreement more easily understood.

Write your contracts before there is disagreement, when both parties are on good terms. By developing agreements on the front end while the relationship is positive, both parties can consider what is fair.

Doing business by written agreement rather than a handshake does not mean that you ignore opportunities to make your customers happy. You can always exceed contractual commitments or allow a customer who has hit a rough patch to break (or postpone) the contract until he is able to fulfill his obligations. Put these exceptions in writing, signed by the parties to the contract. This protects you and helps the customer recognize that you are doing everything possible to maintain a great relationship.

And now for the “fine print”: I am not an attorney, and I am not providing legal advice but rather an overview of the business aspects regarding contracts. You should consult a lawyer for specific questions. Your SCORE mentor can provide you a list of lawyers our clients have used.

Handshakes are OK, but get a firm grip on contracts