The Sharks Are In The Details | Peter Mehit

downloadWe frequently review contracts for our clients. It allows them to get another set of experienced eyes on an important document without the expense of an attorney. We read the document finding clauses and language that may be gotchas, referring them to an attorney for further review if needed.

We’ve noticed a trend recently. Contracts are becoming onerous, in some cases, predatory. We see this trend in everything from leases to service contracts to partnering agreements. Many contracts are becoming one sided in favor of the party writing them. We’ve seen an increase in otherwise smart business people being stung by outrageous contract provisions. They sign these agreements because they are assured they are the same as contracts they’ve signed before. The behavior we’ve seen falls into a few basic areas.

Fee death: This is where you are nickel and dimed for every possible charge that the contract maker can imagine. A client’s recent partnership agreement had an 80 – 20% net profit split in the client’s favor. However, hiding in the paperwork was a 40% overhead fee, tens of thousands of dollars in marketing costs and a bunch of small, mostly unnecessary, charges. The true net profit to our client was 19%. The deal was exactly the opposite of what the client expected.

Unbalanced Risk: A client had the opportunity to start a community support organization for a remote city. The client was a professional with a record of accomplishment and had significant salary requirements. To the client’s surprise, the small city met all of the requirements and sent along an agreement. Upon reviewing the contact, it became clear that our client would have to pay back nearly all the salary if the service wasn’t an immediate success.

Retainers: In the current funding environment, the practice of brokers asking for cash retainers for a funding search is becoming more common. If you are not bankable, you may have to pay a broker up front so you need to scrutinize their contract carefully. We’ve seen brokers requesting up front retainers of $25,000, $50,000 and more to raise as little as $500,000. The contract supporting the request is usually loaded with disclaimers that limit their liability to a ‘best efforts’ basis, which means your result, is based on how ethical they are. Look for brokers that charge smaller retainers on monthly basis. Paying a $2,500 retainer each month limits your exposure if the broker doesn’t perform.

Exclusivity: If the broker or agent doesn’t perform, you’re stuck until the agreement times out. Some of these agreements require you to pay a success fee even if the broker doesn’t do the deal. An exclusivity period for an agent or broker is reasonable, but it should be as short as possible. The length of exclusivity should offset the upfront retainer. If you give the broker more time, you should pay less up front since you are reducing your options.

No Way Out: We are seeing more and more contacts with no termination clause for the signer. That means that you have to honor the contract regardless of what the maker does. The only way to break this contract is a lawsuit. Don’t sign contracts that don’t contain termination clauses for all parties. Also, find out if the contract is assignable by you or the maker. You can be working for someone different from the person you contracted with if they assign the contract.

We are living through a tough time that, unfortunately, is bringing out the worst in some business people. Read every contract twice, and then take a night to sleep on it before signing. It’s a different world than just a few years ago.

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