At DE, our motto is, “You like it, we love it.” I’m kidding. It’s “We add strategy to your ideas so you can focus on what matters most: your business.” If you’re an athlete, creator, or small business owner, it’s difficult to focus on your business if you’re preoccupied with problem-solving. Yes, solving problems is on the daily to-do list of businesses of every size. However, when you’re a micro, small, or medium-size business, your bandwidth for shenanigans is low.

As a small business owner, you may feel like we do at DE—that whenever possible, in whatever way available, you want to work with other small businesses. However, not all small businesses are created equal, and therefore, they’re not all worth your time or hard-earned money. And since, in our experience, the ones that aren’t don’t usually have neon lights alerting us, we have to do our due diligence to sort them out. You don’t have to take this on alone, but if you find yourself in that position, know that signs do usually exist. One place to find them is in the vendor agreement.

Here are three common vendor agreement red flags for you to look out for.

Their Name Isn’t Their Name

One of the first things we do when we review an agreement on behalf of a client is look up the opposing company’s name. We approach that by first conducting a simple online search. This initial inquiry helps us form a baseline as we build a profile to let us know what the company does, how they do it, who they serve, and how they’ve positioned themselves in the market. If this search tells us that they only sell widgets and the vendor agreement states they’re selling everything but widgets, or something in addition to widgets, that would be cause for concern. Moreover, if a company has overwhelming negative feedback, then that is something to be wary of as well.

The next stage of the search is conducted via the state in which the company is registered on the Secretary of State’s or Attorney General’s website. The specific government entity will vary from state to state, but the underlying premise is that every state has a registry where you can look up a company’s registration to see things such as if they’re currently authorized to do business in the state, what the company’s legal address is, and who the registered agent is. The amount and kind of information available also varies, based on the jurisdiction.

If you’re unsure of which state the company holds its primary registration, check a section in the vendor agreement that is usually entitled “Jurisdiction,” “Applicable Law,” “Choice of Law,” or any similar headings. This section will tell you the state or jurisdiction that will hear a dispute regarding the agreement should one arise and to be clear, it should be the state in which the company’s primary registration is held. Once you’ve identified the state, search the Secretary of State’s or Attorney General’s site to see if they are registered to do business in that state. It is important to note that if the company has a name as well as a DBA (“doing business as”), then you should search each name. If they exist, both should be listed on the agreement.

If you’re unable to locate the business on the state’s business search website:🚩Red Flag #1.

‍Difficult Termination Provision

We hope every contract you enter into is successful and that every service or product is delivered timely, professionally, and as specified. However, if an agreement falls short of the contractual obligations, there should be a termination provision (a legal parachute, if you will) for all parties involved.

The exit clause shouldn’t be unusually burdensome, requiring you to complete the Amazing Race or give up a kidney to get out of a deal gone bad. No, it should be reasonable and mutual. Meaning, both parties should have steps outlined to terminate. That termination may not be absolute, and the procedure may be specific to certain situations for each party, but it should exist.

If there isn’t a mutual termination provision or the terms for your withdrawal are onerous, then you know what that means: 🚩Red Flag #2.

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‍Vendor Gets Paid Even if the Contract Terminates or Expires

Be on your guard of agreements in which the vendor is paid regardless of what they do or don’t do under the agreement or even after the contract is terminated. *With certain exceptions, that’s generally cause for concern. In certain types of agreements, for instance entertainment or retail contracts, it’s normal for payments to be made after an agreement has ended. This is usually in the form of royalties or because you have to wait a reasonable period for returns, deductions, and taxes to calculate net receipts. However, if you hire an interior designer and then part ways before the completion of services, but they’re still entitled to all or most of the fee, with very few exceptions, this is a problem.

As a rule of thumb, the vendor should get paid for the work they do, if they do it. Yes, this is irrespective of down payments, deposits, and initial retainers, which serve as a seed to kick the project off. Once the agreement is underway, it should generally be difficult for a vendor to be paid regardless of the work they do or don’t do, or the quality of the goods or services, being provided.

If you see a provision like this, then that means: 🚩Red Flag #3.

At DE, we’ve brokered millions in agreements and we’ve also created, reviewed, and negotiated hundreds of contracts ranging from retail service agreements to speaking engagements and non-disclosure agreements. In our experience, no two contracts are alike; they’re unique to the parties involved and the industry, service, or goods being provided. This is why we highly recommend consulting an attorney when negotiating an agreement with another business of any size or kind.

If you need help with creating or reviewing a contract, schedule your free consultation today to learn how we can help.

*Some exceptions include products and services that are so novel that canceling the agreement after it’s been created and is underway would be an undue hardship: i.e., custom tailored suit or personal chef services.