Seven Pitfalls To Avoid When Negotiating Business Contracts

Avoid these seven pitfalls when negotiating business contracts.1) Letters of Intent

A “non-binding” letter of intent is commonly pursued when parties begin business discussions. Unfortunately, if one of the parties has a change of heart, the letter of intent may work against those who attempt to walk away. Certain phrases can cause the letter of intent to mean more than was originally intended. A court may interpret the letter of intent as meaning “agreeing to talk in good faith.” If both parties agreed to talk in good faith, they may be unable to walk away or ask for better terms later in the negotiations. A truly non-binding document must be carefully drafted to meet those requirements.

2) Due Diligence

“Due diligence,” the steps required to investigate and evaluate the details of an agreement, is a frequently-used term in business deals. Due diligence must be tailored to the needs and expectations of each deal. Too little, and the results can be devastating. Too much, and the involved parties may experience sticker shock when they get the legal bill.

3) Non-competition Clauses

The U.S. economic system encourages competition. The courts do not wish to place restrictions on people seeking to run a business or earn a living, in order to protect those that fail to secure the legally available restrictions. Attorneys who are well-versed in this complex area can advise on restrictions courts typically allow. And there are drafting methods to avoid having the restrictions struck down in their entirety, even if they are too broad.

4) Automatic Renewals

Many business contracts have an automatic renewal clause which keeps renewing unless one party gives written notice, in advance of the expiration date. This type of clause becomes a pitfall if a business has not calendared the notice deadline, or if the notice deadline is so early that it is difficult to make a timely decision.

5) Sales Tax

In a sale of the assets of a business, tangible personal property is generally subject to sales tax even if the transaction is an acquisition of the entire business. In a negotiated business acquisition, the parties involved should firmly detail who will pay the sales tax. In addition, they should not assume the buyer is the one who must bear this cost. Tax laws are complex, and silence may lead to disputes and possibly litigation if one party tries to spring liability on the other at the closing, instead of addressing this issue in the contract.

6) Intellectual Property

A buyer of a business might focus more on the physical condition of the assets and the title to the real property than about who owns the business’ intellectual property (“IP”). But the name, trademarks and logos of the business might be where the real value and future earning power lie. IP is an intangible, and often invaluable, asset that cannot be inspected like a physical asset. IP should be reviewed at an early stage of negotiations, with the assistance of an IP law specialist, making sure the contract clearly specifies what the seller owns, what the buyer is getting and how the seller will transfer it to the buyer.

7) “Best Efforts”

When two parties agree in a contract to make “best efforts” to do anything, beware that “best” might mean investing both time and energy to the exclusion of everything else. After all, anything less than everything that can possibly be done or given is arguably not the “best” effort. Most parties really mean “reasonable” or “commercially reasonable” best efforts, in which case, their contract had better say so. To be on the safe side, “best efforts” should be thought of as the closest thing to a guarantee, and if a business person is not prepared to guarantee something, he should reduce the obligation. Otherwise, “best” might turn out worst.