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Business Lesson 2: In Contracts We Trust

Justin Cooke Updated on February 29, 2020

Note: This is the second part in a series.  To check out the first part regarding our partnership gone bad, check out our post on here.

Starting our business was both exciting and nerve-racking as hell. We remembered the benefits of “being your own boss” and couldn’t wait to get back to working for ourselves. We’d just presented our current employers with an opportunity that stood to save them a ton of money (not on car insurance! 😛 )and put us in a strategic partnership with them and they went for it. We were back on our feet and growing our OWN business again…sweet!

Backstory: Signing The Contract

We agreed to take significantly less money up-front to lock each other into an exclusive, no-cut contract. We figured this was better for both parties…we wouldn’t start shopping their competitors right away and the no-cut clause they offered provided us plenty of time to get our fledgling outsourcing company up and running.

Implementation: Leverage

Business LeverageWe believed we had three points of leverage protecting our interests:

  1. Intimate knowledge/understanding of the process
  2. Deeply integrated with partner/client
  3. A no-cut contract

Point #1 and #2 protected us against the competition…it would take months or years of working with another team to reach the same level we were at. (And we were competitively priced compared to “reasonable” alternatives) “Fake” competitors were (we thought) our biggest threat, due to their propensity to over-promise and under-deliver with an extremely low price-point. Point #3 was put in place at their request…they didn’t want us to walk away, leaving them scrambling to replace our services.

Problem: A New Direction

This worked out great…until it didn’t. Several months into the agreement and they were already looking to make adjustments that were not in-line with the contract we’d signed. A few more months and they were significantly altering the deal. Investment money was tight, their costs to acquire a customer had crept up to unprofitable levels, and they were looking to take the company in a completely new direction. This was painful for us. A contract worth over $500K was critical to our brand new outsourcing company.

Although we hadn’t asked for #3, we’d begun to rely on it like a crutch. We did ask how we could continue to support their business and their new direction, but the financial impact had put us in a defensive, reactionary position and had left a bad taste in our mouths. It’s difficult to put yourself in the position of providing value to your partner when you feel as if you’ve just been screwed.

Aftermath: A Silver Lining

Good came from badWhen the first adjustments or changes came we were in no position to refuse. We still relied on them almost completely for revenue and we had every intention to keep the lights on. We quickly hustled up some new customers and business to replace the declining revenue. When they finally made the decision to shut down completely, we thought about fighting it in court, but realized the heavy investment of time and resources would drain our business, not grow it. Ultimately, we decided to continue moving forward and try to put it out of our minds.

I believe they genuinely felt bad about it and that it’s not how they meant things to go, but business is business and they had a responsibility to protect themselves first. They refused to honor a contract that was no longer a part of their business plan or in the interest of their business.

This put us in an awfully uncomfortable spot. We’d picked up enough additional clients to keep supporting the business and ourselves, but we now had a ton of well-trained, extra staff…which is how we came to start AdSense Flippers. We were pretty bitter at the time, but looking back we see that this painful period forced us to do what we should have been doing anyway…growing and diversifying our business.

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Lesson Learned

In Contracts We TrustThere’s no excusing what they did and, if I’m being honest, remembering this situation brings back bitter memories. However, we could have handled the situation better and could have put ourselves in a position to more positively deal with it when it happened.

Don’t put your faith in contracts. Definitely don’t give up margins on the “promise” of additional business or a long-term agreement. Businesses and business climates change…put yourself in a position to make a decent margin today and tomorrow.

Contracts with clients are better used as sales tools than legally-binding agreements. Keep your contracts short, in plain English, and make the barrier to getting started as low as is reasonably possible. This will get you more sales and provide better focus than trying to enforce a contract when shit hits the fan.

Do you have anything to add to our lessons learned? Any experiences you want to share? Feel free to let us know in the comments below or give us a shout on Twitter!

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  • I always enjoy hearing more details about your start-up story. Somehow, even after LIVING with you for 6 months, it seems there are things I don’t know.

    I think this lesson is applicable for ANYONE who owns a business or even works for themselves. It’s easy to see dollar signs when they aren’t in the bank account yet. However, It’s refreshing for me to remember that even though you guys took a huge hit on losing your first large client, it ultimately panned out in the end.

    Keep on truckin’ guys. Love the new site. 🙂

    • Joe Magnotti says:

      Thanks John! Our story is a messy web, but I think that’s a common path to success. Very few go directly to the top.

  • A business colleague told me a number of years back, “a piece of paper [contract] will keep friends, friends”. The same goes here. Whether it is business partners, joint ventures with customers, standard customer relationship, or otherwise; an “agreement” (as I like to call them) keeps everybody straight.

    Obviously I have not read or seen the agreement you had with this “partner” so I do not know if the following was included or not. I always require any contracts I sign to include a clause that addresses amending the contract/scope of work outlined. This requires duel execution by the signing parties. This clause, combined with a “submit for mediation…we won’t sue each other” statement typically keeps the ill-intended away from the gigs!

    And in closing…I am not an attorney. You should NOT consider the above legal advice. It is intended as general business “best practice” information. 🙂

    …please sign below…
    I will not sue Jason! 🙂

    Thanks for the ever so great content you guys!
    Jason Ansley
    Online Business Manager & Consultant

    • Joe Magnotti says:

      You’re welcome Jason, thanks for stopping by. I would love to see a boiler plate copy of your template contract. Care to share?

  • Great lessons from a painful experience, I dig it.

    I LOVED this and also had to learn it the hard way a few years ago…

    “Don’t put your faith in contracts. Definitely don’t give up margins on the “promise” of additional business or a long-term agreement.”


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