Don’t be the ‘loser’ in a contract!

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By Sue Hirst – Founder, CFO On-Call

Those who ignore history are bound to repeat it…in business that is!

The Australian recently ran a story ‘Lease from hell drove McWilliam’s to drink’. I was struck by this article, because it provides a fantastic lesson for anyone currently in or considering going into business.

The lease in question was evidently a very bad deal for McWilliam’s, as it seems to be what’s brought them unstuck 46 years after being signed. It was a 50 year lease on premises.

The killer clause related to rent being calculated at 8.5% of the unimproved value of business premises at Chullora (Sydney), with the site being revalued and the rent readjusted every three years. We all know what’s happened to Sydney property prices since then!

I shudder to think of contracts like this being signed every day by business owners, without advice being sought or very careful reading.

What seems like an innocuous clause in any agreement (not just leases) can be a ticking time bomb down the track. It’s tempting to sign up to things that sound like a great idea at the time without the benefit of a ‘crystal ball’ to see what might be a very different situation in the future.

Some actions you can take to avoid repeating McWilliam’s mistake:

  1. Never sign anything you don’t fully understand.
  2. If you’re not adept at reading and understanding contracts, seek advice (the cost of which can pale into insignificance compared with onerous and punishing clauses.)
  3. Crunch the numbers! If you’re not good at doing it yourself, get someone who is to do it for you. Don’t just take a ‘thumb suck’ on what may be the financial ramifications of a contract. In the case of McWilliam’s, modelling should have been done prior to signing the contract to calculate the potential increases in rent and how many sales would be required to cover them until the end of the contract. Not just one model, but several scenarios, with positive and negative assumptions. That way people signing the contract know exactly what they’re signing up for and are in a better position to negotiate a deal that’s fair and equitable.
  4. Study the history of a situation i.e. previous rents and property values to help you crunch the numbers. Not an easy feat in this day and age, but better than just going in ‘blind’.
  5. Don’t be afraid to negotiate a contract. Don’t just accept what it says. If the other party won’t budge, be willing to walk away and let someone else take it on.

We see sad business stories like this all the time, that could have been avoided by employing skills other than purely entrepreneurial optimism i.e. thinking “everything will be alright if we just sell enough!”

There’s no point selling heaps if it all flies out the window in bad deals and being ripped off, due to poor risk management practises.

The moral of the story? Get good advice…and get it early!

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