By Austin Peiffer
Associate Attorney

Recently I read two quotes that really struck me: “Nobody’s business plan includes bankruptcy,” from attorney Ferd Niemann and, from software entrepreneur and essayist Patrick McKenzie, “Contracts exist to be followed on very bad days.”

They’re both accurate, of course. Nobody plans to start a business that ends up in bankruptcy, but many ventures end that way. If your farm or business ends up in bankruptcy, that’s a very bad day—but it’s also one of the main reasons contracts exist. Business owners, farmers included, would benefit from time thinking about these two quotes.

Your business plan shouldn’t include bankruptcy, but your contingency plans should. It’s good to consider: I’m going to give this business my all, but what happens if, despite everything, it goes badly? Will I lose my house? Will I lose my investments? Will I be forced into bankruptcy myself? What if my contractual counter-party has a very bad day? Then, start looking at the contracts you’re signing for your business.

Banks and other sophisticated parties already know the moving parts behind these two quotes well. That’s why their contracts contain pages of legalese. Many or even most borrowers don’t read that language, since they’re sure the business plan will work and none of the contract’s, “In the event of default,” language will be necessary. That language wasn’t inserted on a whim; the drafter (or the person the drafter copied it from) likely paid a lawyer to research and draft that provision—and it wasn’t out of a concern for that poor, starving lawyer’s income stream.

It’s said that safety regulations are written in blood; contract provisions are written in red ink. Somewhere, at some time, someone had a bad day, a contract was enforced, and someone lost money. That contract provision exists to allocate the risk in such a situation and make sure that on certain kinds of bad days, one party or another loses money when the contract is enforced. And if someone else drafted the contract that you signed, you can guess how that risk is likely to be assigned.

(319) 363-1641

Don’t let optimism interrupt reality

Sometimes contractual obligations are overwhelmingly one-way. For a loan, the lender’s main obligation is to lend money, while the borrower will have numerous ongoing obligations: submitting reports, maintaining capital ratios, and, of course, making payments. Other contracts have more mutual ongoing obligations, such as an employment or supply contract. Those obligations on both sides matter.

Many contracts are performed by their terms to the parties’ mutual satisfaction, and the default terms are never activated. With others, eventually, someone is going to have a very bad day. Whether it results in bankruptcy or something else, things will not go to plan, and sometimes the parties can’t reach a mutually agreeable resolution. That’s when those oft-neglected default provisions matter.

Business owners, particularly farmers, are optimistic: Tomorrow will be better than today. Things will work out. This counter-party would never mistreat me. It makes sense—if you spend all your time worrying about what could go wrong, you’ll never have time to run your business and make money. But never worrying about the consequences, if things go wrong, is dangerous.

Take some time to think through what kinds of very bad days might happen—whether to you or your contractual counter-party—and what would happen under the contract on those kinds of very bad days. Can you live with that? If not, think about how to address it.

If you need help with the particulars of making a plan, or consulting on the legal provisions of a specific contract, Ag & Business Legal Strategies is here to help.

An instructive case study

One of our clients had a series of very bad days. They were involved in business ventures that went sour when economic fortunes changed, and their business partner filed bankruptcy. Many contracts were enforced against our client. Fortunately, they thought ahead to seek our legal advice, and planned how to protect themselves.

Make no mistake—those days were very bad indeed for the client. They lost investments and business opportunities. But because they planned ahead and didn’t wait to seek legal assistance, the damage was isolated and limited compared to how it could have turned out.

Too many people don’t think about very bad days until they’re already happening. When clients come to us early enough, we can do a lot more to prepare and position them for the best possible outcome. We can’t prevent all bad days from happening, and we can’t prevent painful contractual consequences when they do happen. But if we have time to act, we can often help minimize the extent of their consequences.

Don’t face very bad days alone—reach out to us sooner than later, for your best outcome.

(319) 363-1641

At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our team will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy.

Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow, when it may be too late.