If you are a new entrepreneur, you probably have very little idea about the types of documents and agreements that your company needs in its day-to-day transactions. These contracts are a part and parcel of your business’ life, covering everything from employment agreements to equipment leases.
As a business owner, you will come across different types of agreements and documents as you enter new relationships with people involved in your business, including your clients and employees, as well as suppliers of goods and landlords. Of course, you have your own set of expectations from the person or company you are transacting with, with respect to what you will give and get, and vice-versa. That is what business contracts and agreements are basically for—to describe and define your and the other party’s expectations from the business relationship that you share.
Types of Business Documents and Agreements
Every business day, you are likely to run into different types of agreements as your operate your company. So before you launch your business, make sure that you have already drafted all these documents. Here are some of the most basic agreements that entrepreneurs use in their day-to-day business transactions:
Letter of Intent. Otherwise known as a “Memorandum of Understanding (MOU),” this is a general term for documents that businesses use in sales. While most LOIs are contracts in their own right, some are not.
The purpose of having an LOI is to have both parties—in this case, you and the individual or company you are transacting with—to agree to the terms on that paper, signifying your shared commitment to enter into a deal without actually agreeing to a deal. Simply put, it serves as your agreement to agree. Content-wise, this document is similar to a term sheet, although it differs in terms of structure.
How It Works
As mentioned, the purpose of an LOI is to formalize a preliminary agreement so that before the actual negotiation gets underway, both parties have already understood how things will proceed. Just like contracts, LOIs are up for negotiation. Even if you present an LOI, the other party can counter you either with edits or an entirely new LOI. Despite that, the end product is always the protection of both parties and the fulfillment of the contract which the LOI posts you will agree on.
What It Includes
In most cases, an LOI includes both binding and non-binding provisions. The ways in which this document can be binding vary. Most least-binding LOIs include a contractual agreement, treating it as non-binding. On the other hand, a binding LOI usually includes the rules of negotiation of a contract, rendering it as a binding agreement.
While some LOIs can have very general content, some types specifically spell out the elements of a deal, including the date when the deal will be completed, who will write the contract, as well as the specific details on financing. Such details are usually approved by the board.
On the other hand, there are also LOIs that contain non-disclosure agreements or no-solicitation provisions, which are not very uncommon. Usually referring to specific components of the deal, non-disclosure agreements are where the parties in question agree which information should stay confidential and which should not.
Just like non-disclosure agreements, nonsolicitation provisions stipulate that one party cannot hire any of the employees of the other party.
Uses of LOI
While the general purpose of an LOI is to signify the commitment of both parties to a deal, other common uses of this document are:
- As a means to clarify which of the stipulations of a deal need further negotiation
- As a means of confirming that both parties are indeed negotiating
- To protect the parties involved in a deal
Who Creates It
When you use an LOI in the field of business, the ones to create it are the management and legal counsel of your corporation, which include you. The LOI is most useful when you plan to merge your corporation with another corporation, or acquire another corporation. In this case, the LOI serves to outline your plan to take over the other company and disclose the specific terms of your transaction.
Master Services Agreement. As a business owner, you engage with customers on a day-to-day basis. Let’s say your company provides customers with computer hardware and software support. After some time, you conduct a certain project to replace the old information technology system of your client. In that case, the service specifics expectedly change although the service guarantees stay the same. While you have the option of documenting these guarantees in each contract, the best that you have is to have a master service agreement that will cover all these multiple contracts.
By definition, a master service agreement is a type of contractual document that spells out the performance objectives and responsibilities of your company and the company you are transacting with. It also includes the current and prospective services covered by the agreement. As it clarifies the roles and responsibilities of your company and the other party, it helps you manage the expectations of your customers.
Basically, the main purpose of a master services agreement is to simplify an ongoing contract negotiation. With this agreement, your company and your customers are able to work through the general yet significant subjects that may derail your contract. Creating this agreement ahead of a specific contract will allow you to focus more on specific concerns that will be stipulated in the contract, including price and time frame.
Usually, a master services agreement takes weeks, sometimes even months, to negotiate. The length of negotiation hugely depends on the extent of your agreement with the other party and its priority level. Although some companies tend to defeat the purpose of this agreement by using another master services agreement to serve as a blanket document with little discussion, completing this document provides a template for you to use a basis for your future master services agreement, should your need for another one arises.
As soon as your company deliberates through the negotiation process, you get to understand the various issues and concerns that usually arise. That allows you to identify and address issues quickly when you are placed in a situation when you need to negotiate a new master services agreement in the future.
Many companies suffer from poorly constructed contracts. In some cases, small companies make use of contractual templates by cutting and pasting provisions from an old contract to a new contract. This usually happens when the need to move quickly is there. For instance, when a need for a partnership suddenly arises, or when a prospective client suddenly requests for a nonstandard service.
When time is not a major concern, the master services agreement helps companies avoid the potential issues that usually stem from contracts that are poorly deliberated and constructed. As you ensure that your master services agreement is well thought out and constructed, you prevent your company from having to deal with contractual disputes in the future, as well as reduce the risk of litigation. This is especially since markets, operating environments and technology are ever-changing.
Statements of Work. Usually paired with a master services agreement, a statement of work is used by companies to reduce the complexity and cost of having to negotiate contracts through the use of a core contract that has been negotiated once, and the attachment of individual addenda for discrete engagements. This document is a type of contract that needs to be reviewed and negotiated, although they are generally less critical when compared with the master services agreement.
Sections. While most statements of work vary in content, they generally include arguments about the following:
This section of the document states the marketing objectives of the project, as well as an overview of the proposed solution.
- This usually includes deliverables and inline assumptions. Defining the “how” and “what” of a certain story, this section defines the work that is to be done, as well as the process of doing it.
- Defining “when,” this section should provide a detailed schedule and include all of the touch points of the client and its partner. In the statement of work, this section can simply be dropped as a table.
- This section includes the pricing assumptions, including the payment terms.
- Key Assumptions. This section documents all the general assumptions that are not related to the scope and are not stated elsewhere in the agreement. You can also use this space to document the key master service agreement terms if you have not executed such with your client.
- This section includes the signature of your client and the signature of the key executives of the agency who are supervising the project.
Invoices. Once you have completed work for your client, of course you want to get paid. However, asking for money in a way that will not make you look haughty is a tough thing to do. That is what invoices are for. These documents are what business owners like you use to ask your customers nicely for payments.
An invoice is a written demand for payment. It is a formal way of asking for money and it serves as a control factor for many companies, especially big companies. You send this bill to your customer to establish an obligation on his end to pay for the goods or services that you have provided him. Since it gives a clear record of your sales transactions, this document is one of the most important parts of your bookkeeping and accounting system.
Typically, an invoice includes the following sections:
- This should reflect the date when you created the invoice. Some business owners tend to leave this blank, but don’t. This date is important because it starts the clock ticking on your customer.
- Names and Addresses. This should indicate the names and addresses of you and your customer. Even in online transactions, you are advised to indicate your physical address and not just your email address, in case the other party needs to send you a document.
- Contact Names. The purpose of this part is for good customer relations. Not only does it let you know who the company or individual you are transacting with, it also makes sure that you spell your names correctly.
- Items Purchased. May it be products or services, you need to provide a description for each. This should include a detailed and specific description of the items purchased, including their quantities and prices.
- Terms of Payment. This should specify the time when the entire amount you are asking from your customer will be due. For example, you may specify in this part, “net 30 days.” That means that your customer should pay the specified amount in the invoice within 30 days.
Invoicing a Customer
Whether you are using a pre-printed invoice or an online business accounting software, the process of invoicing a customer works pretty much the same way. But the most important thing you should remember in invoicing is that you should never invoice a customer or client when you have not yet finished shipping or delivering the product or service expected of you.
Here are the steps you should follow when invoicing your customer:
- Identify your customer and sub-customer, if applicable.
- If there are any previous document numbers related to the sale indicated in the invoice, include it. Such includes purchase orders or sales agreements.
- Specify the items sold and delivered. This includes the name of the product or service, including their quantities and rates.
- If your customer has made any deposits, include it, in the same way that you should include any discount applied to the invoice.
- Offer your customer options for the payment method.
- Include the shipping terms for the products shipped.
- Indicate the terms of sale.
Drafting these documents and agreements before starting your business operations is imperative. As mentioned, you deal with customers every day and your relationship with them is what these documents and agreements cover. A formally signed contract can’t be any weightier than in business, especially for large companies where huge amounts of money are usually at stake in every business transaction.