Before You Sign: What Small Business Owners Should Look for in a Contract

When you’re running a small business, you have enough to worry about without spending hours negotiating every contract. You want to get the deal done, build the relationship, and get to work. Whether you’re signing a master services agreement, a vendor contract, or an agreement with a new customer, it’s tempting to focus on the price and move on. But the fine print matters. A contract can look straightforward on the surface while putting your business at risk in ways you may not realize until something goes wrong. And if you’re using the other party’s standard form, remember that it was likely drafted with that party’s interests in mind. Here are a few things I recommend paying attention to before signing.

1. Payment Terms: When and How Do You Get Paid?

Start with the basics. How much will you be paid, when is payment due, and what happens if the other party disputes an invoice? Look for provisions that allow the customer to withhold payment, offset amounts it claims you owe, or reject invoices based on technical requirements. For example, a contract might allow a customer to withhold payment for an entire project because of a dispute involving one invoice. Another might say that invoices submitted more than a certain number of days after the work is performed can be rejected altogether. Those provisions can create real cash-flow problems, particularly for a small business that has employees, subcontractors, and other expenses to cover. Make sure the contract clearly explains when payment is due, how disputes will be handled, and whether undisputed amounts must still be paid on time.

2. Termination: What Happens If the Deal Ends Early?

Many contracts allow one or both parties to terminate the agreement before the work is complete. That is not necessarily a problem, but you need to understand the consequences.

Can the customer terminate the agreement for convenience, even if you have done nothing wrong? If so, will you be paid for work already performed, materials purchased, and commitments you cannot cancel? What happens if the customer terminates the agreement after you have hired additional employees or committed significant resources to the project?

A termination provision that only requires payment for completed work may leave you absorbing the cost of work in progress or expenses incurred in reliance on the agreement. Consider negotiating language that addresses those costs and gives you a reasonable opportunity to fix a problem before the other party can terminate for breach.

3. Indemnification: What Are You Agreeing to Pay For?

Indemnification provisions are among the most important—and most frequently overlooked—parts of a contract. In simple terms, these provisions can require you to cover certain losses, claims, damages, or legal expenses incurred by the other party. The key is understanding how broad that obligation is. Some contracts require a business to cover claims arising from virtually anything connected to its work, even when another party contributed to the problem. Others require you to defend the other party in a lawsuit, potentially creating significant legal expenses before anyone determines who was actually at fault. Where appropriate, indemnification should be tied to risks your business can reasonably control, such as claims caused by your negligence, misconduct, or breach of contract. You should also pay attention to whether the provision covers third-party claims, direct disputes between the parties, or both.

4. Liability Limits: Is Your Potential Exposure Reasonable?

Related to indemnification is the contract's limitation-of-liability provision. Does the agreement cap the amount you could owe if something goes wrong? If so, what is the cap based on—the amount paid under the contract, the fees paid during a particular period, or some other measure? Also look for exceptions that could eliminate the cap for certain claims, such as indemnification obligations, confidentiality breaches, or intellectual property disputes. A cap may look protective until you realize that the largest potential claims fall outside it. The goal is not necessarily to avoid all liability. It is to make sure the potential exposure is reasonable in light of the contract's value, the risks involved, and the insurance coverage available to your business.

5. Insurance Requirements: Can You Actually Meet Them?

Some agreements require specific types and amounts of insurance, additional-insured status, particular endorsements, or extended coverage after the contract ends. Before signing, compare those requirements with your existing policies. Do not assume that because you have general liability insurance, you automatically satisfy every requirement in the agreement. Some endorsements and coverage limits may cost extra or may not be available under your current policies. It is worth having your insurance broker review the requirements alongside your attorney. The contract should not commit your business to coverage that is unavailable, impractical, or disproportionate to the work being performed.

6. Scope of Work and Deliverables: Are Both Sides on the Same Page?

A surprising number of contract disputes start with a simple disagreement about what was supposed to be delivered. The agreement should clearly describe the services, deliverables, deadlines, responsibilities, and assumptions underlying the deal. If the customer requests additional work, how will the parties approve changes to the scope, schedule, or price? This is particularly important for service businesses and projects that may evolve over time. A vague scope combined with a fixed price can leave you performing additional work without additional compensation. A clear change-order process helps both sides manage expectations and avoid disputes about what was included in the original deal.

7. Intellectual Property: Who Owns the Work?

If your business develops software, designs, reports, processes, marketing materials, or other work product, pay close attention to the intellectual property provisions. Some agreements transfer ownership of nearly everything created during the engagement. That may be appropriate for work specifically commissioned by the customer, but it should not inadvertently transfer your pre-existing tools, templates, methods, software, or other materials that you use across multiple projects. The contract should distinguish between work created specifically for the customer and intellectual property your business already owns or develops independently. If the customer needs to use your existing materials as part of the deliverables, a license may be more appropriate than a transfer of ownership.

8. Contract Changes and Conflicting Documents: Which Terms Control?

Many business relationships involve more than one document: a master services agreement, a proposal, a statement of work, a purchase order, and sometimes additional terms printed on an invoice. What happens if those documents conflict? The contract's order-of-precedence provision determines which terms control. For example, a master agreement may say that it overrides all terms in your proposal, even if your proposal contains the pricing, scope, and payment terms you negotiated. Make sure the documents work together and that the contract clearly identifies which terms govern if there is a conflict. Do not assume that sending a proposal or adding terms to an invoice will override an agreement you have already signed.

9. Other Restrictions That May Affect Your Business

Depending on the agreement, there may be other provisions worth reviewing, including confidentiality obligations, restrictions on working with competitors, audit rights, assignment restrictions, and requirements to follow the other party's policies.

Pay attention to obligations that extend beyond the contract's term or apply more broadly than the actual business relationship requires. For example, a restriction on assigning certain employees to other customers could interfere with your ability to operate your business. Broad audit rights may also require you to provide access to records that go beyond what is reasonably necessary for the engagement. The right approach depends on the nature of the deal, but these provisions should not be treated as boilerplate simply because they appear in a standard agreement.

Why Have an Attorney Review the Contract?

You do not need to turn every contract into a lengthy negotiation. In many cases, a handful of targeted changes can address the biggest risks without slowing down the deal or damaging the business relationship. An attorney can help identify provisions that create disproportionate risk, explain how they may affect your business in practical terms, and propose reasonable revisions. Just as importantly, legal review can help you understand which terms are worth negotiating and which are unlikely to justify holding up the transaction. The best time to address a contract problem is before you sign—not after a customer refuses to pay, a project goes sideways, or a dispute turns into litigation.

At Hoffman Law Offices, LLC, we work with businesses on contracts and day-to-day legal issues, helping owners understand what they are agreeing to and protect the businesses they have worked hard to build. A little attention to the contract on the front end can save significant time, money, and frustration later.

This article is for general informational purposes only and is not legal advice. Contract issues depend on the specific language, facts, and applicable law.