OPERATIONS

Do I Really Need a Written Agreement?

Is a handshake enough when entering a business alliance, or should you protect yourself with a written agreement? Here's what a written "memorandum of understanding" should include.
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Inc. Query

Q My partner and I own a small paving company. We have been sharing work with other companies. If I did everything that my lawyer tells me to do before entering into those agreements, I'd be overwhelmed with legal bills and paperwork for jobs that typically bring in revenues of about $10,000. So usually my partner and I end up discussing the job with people from the other company and then do business on a handshake--or sometimes we write up a one-page letter of agreement. Am I doing enough to protect myself? How do I balance trust with covering myself from the possibility that something may go seriously wrong? --Joe Foy, owner, Asphalt Experts LLC, East Hartford, Conn.

A. "The primary issue in alliances is not protection. If it is, then they're destined for failure," says Ted Hoffman, managing principal of Alliance Ventures, a San Francisco consulting firm. Still, he adds, "protecting one's interests in an alliance is a practical business consideration." Hoffman recommends creating a "memorandum of understanding" (MOU), more comprehensive than your one-page letter but far less daunting than a detailed legal contract. "It should spell out the principles of the working relationship," says Hoffman, "like how you'll handle disagreements, confidentiality, what the risks are, even how you'll terminate the alliance."

If the jobs you do with your partners remain relatively small, you needn't go overboard with your MOU. The document's purpose isn't so much to protect you from every possible liability as it is to ensure that you and your partner are thinking along the same lines. Russell Chin, a partner at the Boston law firm Sherburne, Powers & Needham PC, says MOUs, commonly used in Asia, are becoming an increasingly popular alternative to full-blown legal contracts in certain situations. "The partners should sit down and define the relationship," he says. "They'll realize what is most important, and that's what should be included in the memorandum."

But no written agreement is foolproof. Jay Van Vechten's New York City-based public-relations firm, Van Vechten, Burke & Associates, once formed an alliance with a British partner. "It was set up so that all the money went to him in London; then he would pay me," says Van Vechten. The partner declared bankruptcy and never paid up, he says. "We had a written agreement, but it wasn't worth the paper it was written on. When I finally looked closer into his past, there was a long history of financial problems." The lesson: the success of an alliance relies far more on the integrity of its partners than it does on any document. --Donna Fenn


Documenting Your Alliance

After hearing the experts' advice about how to use a memorandum of understanding in an alliance, reader Joe Foy had further questions.

Foy: What should I include in a memorandum of understanding?

Lawyer Russell Chin says an MOU should start by identifying the parties involved and describing the business they're doing together. "It should include what each of them is going to do, how much it will cost, and when the work will be completed," says Chin. Other elements to consider: pricing and payment terms, client contact, and responsibility if the client is dissatisfied. You should also address how you'll resolve disputes or terminate the alliance if necessary.

Foy: It's difficult to talk about terminating an alliance when you're just getting started. How do you bring the subject up?

The key is to do it early and in the context of how the relationship might evolve, says consultant Ted Hoffman. For example, in time the marketplace may change. "When you phrase it in this way, it's not a threatening issue."

Foy: Do I need to have a lawyer look over an MOU?

Not necessarily, says Chin. But, he adds, you might want to, anyway.

Foy: What do I do if my partner balks at signing an MOU?

"Find a new partner," says Nick Harville, a Gleneden Beach, Oreg., network broker. "Very often, a document is a test of commitment." --D.F.

Last updated: Apr 1, 1998

DONNA FENN | Inc.com Contributing Editor

Donna Fenn is the author of Upstarts! How GenY Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.




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