Commitments, contracts are risky for small businesses

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Have you ever been burned by a contract or committed to something you later wished you could get out of? Business commitments can be risky because they lock your company into obligations that could potentially have a negative impact on the company in the future.

While the risk of commitments can be a problem for businesses of any size or age, it’s especially true of smaller companies or start-ups. This is because the smaller and younger the company, the more flexible it must be to take advantage of its ability to grow. Locking it down with commitments can take away the company’s flexibility and its ability to be successful.

Common commitments to be wary of are:

Long-term leases. Committing to a lease that locks you into a long period of time on space can be a problem because your circumstances could change and the lease could become a steady drain on your business. Landlords obviously want to get the longest lease they can, but may be willing to negotiate. Try to reduce your risk by asking for a shorter lease term and an early termination clause, and always try to get a clause allowing you to sublet the space.

Quickly amortizing loans. A shorter amortization schedule could handcuff your business with unmanageable monthly payments if your circumstances should change. For business borrowing, it’s better to try to get the longest amortization possible. In most cases, there is no prepayment penalty so you can pay off the loan sooner if you choose to do so. But if your business should encounter a lean period, you can still afford the payments.

Employment agreements. It’s sometimes necessary to sign employment agreements to obtain high-caliber staff, but they can potentially lock you into a problem situation. That “dream employee” could turn into a nightmare and you don’t want to be trapped by contract terms. Your agreements need to allow for changes in job description, title, hours and pay under certain conditions. They should also provide for the company to pay the least amount of money possible if you should terminate the person. A good business attorney can prepare an employment agreement that protects your interests.

Long-term contracts. Vendors will often provide discounts if you sign long-term contracts for products or services. The savings might be nice but locking yourself into a long-term obligation can be an issue if you no longer need the product or service, you become dissatisfied with the product’s quality, you learn you can get a better price elsewhere, or you experience cash flow issues. Discounts need to be weighed against the risk of commitment and, where possible, an “out” clause needs to be built into the agreements.

Signing personal guarantees. Many companies will put personal guarantees in front of you, hoping you’ll sign them. If you do, they’ve attached a liability to both your business and your personal wealth. With the exception of banks and credit cards, they can often be eliminated if you explain that you do not sign personal guarantees.

With some creativity and negotiation skills, many of the risks related to these commitments can be significantly reduced. And it’s well worth the money to have a lawyer review your contracts to make sure you’re not taking on unnecessary risk. Bottom line: never, ever sign a document committing you to something in the future without first determining what the true risk will be and whether there’s a way to mitigate it.

Laddie and Judy Blaskowski are partners in BusinessTruths Consulting, Inc. and several other businesses, and authored The Step Dynamic: A Powerful Strategy for Successfully Growing Your Business. They can be reached at Judy@BusinessTruths.com.