Reader-to-reader advice.
Contract Counsel
Can you tell us about the initial forms and contracts that must be exchanged between companies that want to form an alliance? When do you use a letter of intent? A joint-venture agreement? How can you make sure they hold up?
Brett Truett
President
Soft-Noze USA
Utica, N.Y.
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Actually, with handshakes and oral agreements alone you can go a long way toward forging a watertight strategic alliance. But at critical points in the process, when the terms start to firm up, it's always best to rough out a contract and run it by your lawyer. "It's nice to have a piece of paper filed away in case of an emergency, such as a management shake-up," explains lawyer Fred Steingold of Ann Arbor, Mich. Of course, there are plenty of transactions for which contracts, to be valid, must be penned rather than spoken. Check your state's statute of frauds for those transactions.
Handshake agreements work fine as a starting point when "virtual company" builder Paul Farrow and his alliance partners get into serious negotiations. "We use a handshake as a precursor to a written agreement of mutual expectations," says Farrow, founder of Walden Paddlers, a kayak maker in Concord, Mass. (See "Virtual Realities," August 1993, [Article link].) "We've never used letters of intent or layers of contracts. We know what we want. Our agreements work because we test them."
Test them? "Yes, we call it a four-point transaction test," Farrow explains. "The first part is to make sure we're both working toward the same mission, which could be a single transaction or something that changes life as we know it." Second, both parties must have clear expectations about the scope and schedule of the deal. They must both get clear benefits from the association, too. And surely not least, says Farrow, the parties must trust each other.
Speaking of trust, Steingold suggests you draw up a confidentiality agreement that allows parties to share vital financial and strategic information without worrying about leaks if the venture doesn't pan out. If your would-be ally's tax reports and industry-specific documents are hard to decipher, you should include a clause that allows each company to share information about its prospective partners with its accountants or lawyers -- the people who can see the less obvious conflicts of interest that could later rip your alliance apart.
After that, depending on time constraints and the scope of the deal, you could sign a letter of intent that "sets the ground rules" of a still-hazy deal, says Steingold. The document can be as sketchy or as precise as you wish, but at the very least it should spell out what the parties are expected to accomplish within, say, 30 or 60 days. As the relationship matures and the stakes increase you may want to lock yourselves in for the long term with a more formal and comprehensive joint-venture agreement. "What's important here isn't what kind of contract," stresses Steingold. "It's the process of analyzing the deal and forcing each other to think about the details."
Luckily, there are workbooks filled with ready-made partnership and alliance agreements that also explain how and when to use them. Recommended are Stephen Elias and Marcia Stewart's Simple Contracts for Personal Use (Nolo Press, 800-992-6656, 1994, $16.95) and Daniel Sitarz's The Complete Book of Small Business Legal Forms (Nova Publishing, 800-462-6420, 1991, $17.95). Consider, too, top-selling software packages. "These templates are good starting points because you'll want to add your own clauses," Steingold says.
Walden Paddlers' Farrow agrees. The recurring elements of his agreements, which have been committed to floppy disk, include production quantities, flexible schedules, logistics, and any other expectations that can be quantified. Once each side has mapped out its own part of the bargain, says Farrow, "we sit down on the same side of the table and figure out where we want to go." Steingold likes that simple logic: "It's not the contract that makes it work," he says. "It's the meeting of the minds."
Barter? Beware!
What are some tips for shopping among bartering companies?
Kevin Nikkhoo
President
Vertex Systems
Los Angeles
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We're glad you asked. Commercial barter, which has long been used to supplement the cash transfers of hulking corporations on the New York Stock Exchange, is becoming popular among small companies. Practitioners, some of whom claim that up to 25% of their business is conducted via noncash trades, say it's an economical way to improve cash flow, move inventory, and open up new markets -- in short, to conduct business during lean and flush stages of business development. Barter exchanges, which number about 400 nationwide, are sprouting up everywhere. But this industry, like most others, has its share of shady characters.
To wit: Seasoned swapper Greg Murtha relates a story about a barter company he once worked with, whose significant accounting "error" would have cost his company $10,000 if he hadn't done his own detective work. "The barter company was printing funny money," he says. Today Murtha, director of sales and marketing for Angel Fire Resort, a ski and golf venue in Angel Fire, N. Mex., has an internal system of checks and balances that keeps his barter exchanges honest. His advice: beyond doing the usual business reference checks (Better Business Bureau, chamber of commerce, current and former users), ask the barter company itself for the name of its governing association, and call that group to get a reading on the exchange's reputation.
