Handshakes Vs. Contracts: Which Do You Think Is Better?
Yes, I know . . . on the face of it this seems like an incredibly dumb question. But is it?
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In the past two weeks I have found myself in the challenging position of advising clients on the basics of the difference between executed contracts vs. doing business with just a handshake. And, to make matters even worse, I was a partner in one of the deals that involved just a handshake.
As someone with lots of experience and who considers himself to be pretty savvy in the negotiation and paperwork arena, you can imagine how frustrated I am at myself over this critical lapse in best business practices.
So, how does a seasoned investor allow themselves to lose a deal because a purchase agreement wasn’t executed? That’s easy. Trusting that a handshake could overcome dollars signs.
Trust But Verify!
I guess if that statement is good enough for Ronald Reagan, it should be good enough for me. Right?
Let me explain the circumstances and then provide some very obvious insight.
My business partner has done several deals with a close acquaintance, who approaches the business partner with a hard to turn down opportunity — an opportunity that the acquaintance already owns free and clear. My partner of course jumps at this opportunity and the basics of what the agreement would look like — not enough for a verbal contract, but close enough to start planning the project and shopping for investors and lenders. On the day that the purchase agreement is to be executed and a very large EMD (earnest money deposit) is to be made, the acquaintance proudly announces that he has just signed a contract to sell the property outright to a heavy hitter. UGHHHHHHHHHH!
From the time the acquaintance approached my partner with this deal to the day that the purchase contract was to be executed was about 45 days. You can see how painful this has been for me, as there are enough beginner mistakes in this situation to last a long time.
A Look at Our Mistakes
The biggest mistake is that my partner and by extension myself, believed that the existing relationship with the acquaintance would be enough to keep the deal secure. Clearly, we were wrong!
The next big mistake is that even if we couldn’t get a contract executed we should have captured all of our discussions in the form of a letter of intent, or option agreement until the purchase agreement could get completely negotiated.
The third big mistake is that based on the supposed close relationship, we took our time, not on purpose… but we did not create the needed sense of urgency to get the contract signed.
And lastly… we were just DUMB ASSES and deserved to loose this deal!
Now, in all fairness to the acquaintance, the outright sale to the heavy hitter will net the acquaintance substantially a higher sales price and profit more quickly than the approach we had agreed to with him. Obviously his self-interest was much more important to him than the handshake. Go figure!
And now for the most important lesson in this saga of lessons…
People, whether they are sellers or buyers will always, always, always act in their own best interest. While there may have been a time when handshakes and a nod were all that was needed to get business accomplished, sadly as I have learned, that approach does not work in today’s world.
Bottom line, if it isn’t on paper with signatures, you don’t have a deal!
Best of luck!
Photo: Bruno Covas