5 contract negotiation considerations
Contract negotiation is the process of give and take the parties go through to reach an agreement.
1. Negotiation Comes Down to Risks and Revenues:
In a typical contract negotiation, each party compromises on some issues in order to get what it really wants. Although there are always lots of details to work out, most contract negotiations boil down to two essential factors: risks and revenues.
2. The Business Side vs. the Legal Side of Negotiations:
Often, contract negotiations have two distinct stages: negotiation of the basic business terms followed by negotiation of the legal terms.
After having discussed the basic aspects of a contract, both parties will need to be in agreement with several objectionable provisions that may appear on the document, such as an attorney fee provision or a provision that requires one of the parties to obtain insurance.
Both involved parties need to reach reach an agreement before the contract gets signed.
3. When Is There an Enforceable Contract?
Under contract law, there is no contract until all of the material elements of the deal have been negotiated and agreed upon.
So, a legal dispute over whether and when a contract exists will boil down to whether any of the outstanding legal issues are material elements of the deal.
If the parties have agreed to the business terms of the deal and want to proceed before hammering out the legal details, they can use an escrow account or condition the release of funds on the execution of a written agreement. This avoids the problem of having to chase after money you laid out if the deal never materializes.
If the negotiations fall apart, everyone gets back what they put in and moves on.
4. Lawyers and Negotiation:
If you own or run a business, you may have experienced the following situation. Your company believes it has reached an agreement with another company on the business terms of a deal.
Both sides bring in their lawyers to hammer out the details -- and as soon as the lawyers get involved, everything goes down the tubes. That could be because lawyers have three potentially conflicting factors at work when they're negotiating.
They want to:
- protect their clients by minimizing risks and maximizing revenue
- act professionally so they won't be vulnerable to malpractice claims or disappoint clients (who can always find another lawyer), and
- earn money (this last factor creates the perverse incentive that the more time it takes to hammer out a deal, the more money the attorney makes. In other words, it is profitable if either or both sides drag out the negotiation).
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About the author
Marjorie Weber has been educating entrepreneurs and guiding them in their search for capital for the past 16 years: combining business training programs with one-on-one mentoring. Marj is currently a financial advisor for Florida SBDC at FIU. She was Chair of SCORE Miami Dade from 2010 to 2014. She also serves as an advisor to the Goldman Sachs 10,000 Small Business Program and the SBA Emerging Leaders Program and provides training for Veterans seeking an entrepreneurial path upon retirement from the service. She has facilitated workshops under the auspices of Miami Bayside Foundation, Little Haiti Cultural Center and .local banks. She commenced her career as a real estate investment banker in New York and Miami..She uses these long term relationships to assist her clients in accessing capital. She knows both the process and the people and has assisted in providing financing for hundreds of businesses in Miami Dade.