A very common question among businessmen: Is it necessary to “paper” deals? During the 25 years I’ve been in business, more than 90% of the deals I’ve made have been oral. Usually, the process is some version of this: I’m talking with a colleague/competitor about what I’m doing/he’s doing and some common interest pops up. One of us says, “Hey, would you like to do this together?”
The other says, “Sure.” Then it’s “What do you think is a fair deal?” An obvious suggestion is made. And that’s it. And I’m not the only one who operates this way. So do most of the successful businessmen I know. Why? Because, contrary to what you read in novels, business works when it’s based on trust and cooperation — not when it’s cutthroat and competitive.
Yes, there are businesspeople out there who build careers based on deception and deal breaking, but those guys are quickly found out and abandoned. Instead of spending a lot of my time and energy trying to hack out the perfect deal on paper, I’m happier to get things generally agreed to in person and then have other people work out the details as we go along. That said, I’m very much in favor of written agreements.
Not the big, lengthy back-and-forth kind that run up legal fees and slow projects down, but the faster two-page memos that identify (1) the fundamental idea of the agreement and (2) the key provisions. I’m reminded of this today because I’m in the middle of straightening out a mess that came from confusion about a deal made two years ago. With partners of good will, the biggest reason to write down an agreement is to document what you thought was fair at the time.
Things can change, and you don’t want your memory changing with them. I also believe that you should run your deals by a few well-intentioned critics, including a lawyer. Don’t let them clog up the deal with arcane contingencies. Use them only to identify any major problems or obstacles you might have overlooked. A good rule of thumb: If the agreement is more than two pages long, it’s too cumbersome.
The bottom line on deals is this: Paper won’t usually keep a bad deal from falling apart, and neither will it keep bad partners from cheating. If they want to screw you, they’ll find a way to do so. The reason you should document your deals, then, is not that you want to keep your partners from being dishonorable but that you want to document the big issues — what each partner meant to put into the deal and get out of it — so that later on you can refer to the written agreement for clarification.