Contracts close the deal

Q: There was a time when shaking hands with a person could close a deal, but these days most business transactions are complicated by contracts. Do handshakes still have meaning in modern business?

A _ Winfred Kagwe, Kenya

A: The handshake is important to business because trust is central to all relationships. In an ideal world, a handshake would be all that an entrepreneur or executive needs to seal a deal with a business partner, an investor, a company or a client – after all, reputation is everything in life as it is in business, and if you break your word, you damage your reputation.

However, the handshake is only the beginning of the process of building a working relationship. Business conditions can change dramatically in a very short time – everything from the state of the economy to consumer tastes – and interpretations of how a deal will be applied in different circumstances can vary wildly.

Also, memories change over time. When the parties to the agreement try to recall the exact details of a verbal deal years later, it’s like the children’s game where a whispered phrase is passed from person to person, and always turns out to be wildly different at the end of the line. This is partly because people are prone to being too optimistic at a deal’s outset, and then when dreams meet reality, memory becomes selective – especially when large sums of money are involved. It is much more likely you and your partner will fall out if you have only a handshake agreement, so follow up that handshake with a clear, simple contract that spells out the terms of the deal.

I learned this early on. In Virgin Records’ early days, there were a number of occasions on which we signed up bands on a handshake basis, only to find out later that our handshake had been superseded by a written legal agreement with a competitor. We lost out on deals with bands like Dire Straits and 10cc for this reason. (The underlying problem was that in music, there are many parties involved in any deal – band members, agents and advisers can all have very different agendas.)

In some cases, we should have updated our agreements to reflect the successes of some deals. When musician Mike Oldfield came to us with the music for “Tubular Bells,” we took a risk in funding the album’s production and distribution. It became an amazing, enduring success, helping to launch our new company. We updated his deal over the years, but with hindsight, we could have been a bit quicker to revise the terms, for more equitable returns for both parties.

But I had learned that relying on a handshake could be very risky in contentious situations, so our simple legal agreements did allow me to settle issues quickly and in some cases, to be a little more generous than a contract stipulated. When Nik Powell, my friend and co-founder, decided to step aside from Virgin, we had a basic agreement in place that helped us to decide how to proceed quickly and cordially. I am glad we had the foresight to put that document together, because we parted ways amicably, and have remained friends for 40 years.

Many entrepreneurs launching their first ventures do not obtain contracts simply because the process is known to often be slow and arduous, and many businesses are launched in a hurry.

Lawyers need to ensure that they cover every eventuality, which may mean they add pages of legal clauses. To try to avoid this situation when you’ve reached a deal, you and your counterpart should together make a basic outline of your agreement and then pass that document to the lawyers. You’ll find that if you take control of these first steps, it is often easier to keep a handle on the drafts that follow.

A reputation for being fair and consistent is not just important for entrepreneurs building their businesses; everyone in your company, from the executives to the front-line employees, needs to follow through, continuing to build the relationships created by your agreements. Their going the extra mile can make all the difference in establishing your company’s reputation. If they’re going to do so, however, they need to know the agreement’s terms, so many of your people will need to see the contract as well.

By all means, shake hands on a deal – but then make sure to ask your lawyers to record the details. It could be the best bill you ever pay!

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