It seems every week I have another consultation with new clients that cut corners when documenting their deal, and then are later dealing with legal problems. Truly, we can be our own worst enemy!
Let me assure you, it’s not IF a partner, vendor or customer is going to drag you into a law suit…it’s WHEN. I see so many investors and small business owners lose their business and sometimes everything, including their savings, to a deal gone bad and poor documentation.
In the United States a contract can be created with a simple verbal understanding, not even a handshake is required. Certainly you can imagine that now emails are considered binding contracts in Court and can drag us into unsuspecting relationships and claims.
You may say, “well, if emails are considered binding, then great, why do I need a contract? I have the emails that state our relationship and understanding, that’s all I need”- WRONG.
It’s shocking to me how many small business owners will…
“step over a dollar to pick up a nickel”, OR
believe “it will never happen to me”, OR
state “they gave me their word”.
For some crazy reason, we think it is more expensive to call a lawyer and have them review a contract for one hour, then risk a multi-thousand dollar investment to an email chain or a handshake.
There are several provisions that are critical in a well drafted contract that emails would never include. For example:
– A provision for attorney’s fees for the non-breaching party if they win.
– Mediation or binding arbitration clause so you don’t have to go to Court if you don’t want to.
– A venue or choice of law provision on which state law would be applied in a contract dispute and where the dispute would be litigated.
– Even basic terms can be missing in a chain of emails, such as place and time as to the delivery of goods or services, the total price for the project and provisions if it is only partially completed, exit strategies, how losses or additional contributions would be handled.
Essentially, emails don’t include all of the ‘worst case scenario provisions’ that a lawyer would easily catch in a brief review.
You will see that I’ve had several Radio Shows dedicated to fraud and the pitfalls of investing with others. PLEASE don’t take this to mean I think ‘partnering’ or investing with others is a bad thing… it can be wonderful.
However, if you’re going to invest with others, you need to be careful and cautious, yet optimistic and hopeful. I often state:
“Negotiate like enemies…sign the deal…and then operate like best friends.”
Affinity fraud is one of the greatest types of scams in America today. This is where a person in a relationship of trust talks another into investing with them and doing so without proper legal documentation or review.
The person could be a neighbor, a friend, a boss, a church leader, and oftentimes a family member. They have no plans of paying you back and want to risk your money not theirs. If it pays off…great! If not, you’re left holding the bag.
They will often times use phrases such as:
“We don’t need an attorney…don’t you trust me?”
“We have to hurry or we are going to miss out on this deal?”
“Trust me, I have done tons of deals just like this. We can use the documents I used before and save the cost of an attorney”
Please watch out for these ‘red flags’ and ‘key indicators’!
When you hear these sorts of statements, make sure that you get a written agreement, reviewed by a third-party that’s looking out for your best interest.
I also want to talk about YOU as the ‘promoter’ or maybe bringing a deal together. Maybe it’s not your money on the line. That’s great. I’m excited for you and the opportunity that lies before you.
However, losing your own money can be the least of your worries. If a partner of yours feels like they are being treated more like an investor, and claim you violated securities laws, you’re potentially going to jail. That’s right.
Be very very careful when doing deals with others; taking the money of others and then losing their money. These “victims” as they will call themselves, will ultimately contact every Federal, State, City and County agency and prosecutor that will listen to them and your life just got A LOT more complicated.
Bottom line…when you are partnering with others, consider a formal entity, use a quality contract and have it reviewed by an attorney. If you are investing your money with others be even more cautious to double check the investment and the character of your partners, as well as using good documentation. Finally, if you are taking the money of others, understand the seriousness of the role you are playing and be respectful and cautious, encouraging legal representation for your investors and having clear documentation.
If you need help in the review or drafting of a contract, please know we can be of service here at KKOS Lawyers for the same price as establishing a traditional corporation. You might even able to talk us into donating some of the cost to a non-profit as well.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.