Self-Taught MBA: Between a Handshake Deal and a Formal Partnership, There’s an MOU
Even with good intentions, honest people can end up with a big misunderstanding. No doubt you’ve experienced a handshake-deal turn sour only because each of you thought you were shaking hands on a different agreement. This is why formal contracts and partnerships exist, to create clear legal parameters for individual rolls, responsibilities, commitments, and financial agreements. These binding, legally enforceable agreements can burgeon into huge, complex documents–especially when the deal is at an early stage, and specifics remain unclear. There are so many contingencies that in trying to cover every base you end up with a pile of legal documents so thick and densely written that neither party truly understands what they are getting into.
I hate this sort of agreement. Although sometimes it’s necessary, the long-form contracts and partnerships are often premature and unnecessary–a little like getting married before dating. If you have a simple deal, or want to clearly outline your intentions to avoid misunderstandings, consider a preliminary form of agreement that many governments use: The Memorandum of Understanding, or simply “MOU.”
What’s a MOU?
The MOU is a very flexible form of agreement that can be legally binding, but often is used precisely to avoid creating strict legal obligations. It only serves to clarify and memorialize the intentions of two or more parties.
For example, let’s say you are bidding on a project with another builder and two subs. It’s a complex project that will require all four of you to combine your resources and skill to effectively complete the job. And by presenting yourselves as a consortium of companies, you increase your credibility and the likelihood of landing the job. It’s too early to create a partnership agreement because you may not win the bid. But you want to know that all four parties are committed, if you do win, and that the roles, responsibilities, and financial agreements are clearly understood. You may also want a document to show your potential client that these commitments exist. This is the time to use an MOU.
On the other hand, you may have a very simple deal, but you want to reduce it to writing. Perhaps your plumber has a lead on a job and he wants to make sure he will be the plumbing subcontractor on the project if he makes the introduction, and you get the gig. This is another time to use an MOU, which could be drafted as legally binding, but without overcomplicating the deal.
An MOU is basically a handshake reduced to writing with just enough thought and detail to avoid a major misunderstanding.
The Anatomy of an MOU
There is no strict form or “rules” for writing an MOU. What follows is a very general and common outline for the parts of an MOU, rather than a format to follow. It’s the format I follow. But you will want to develop your own.
Title: “Memorandum of Understanding between Trust Builders and Honest Plumber”
Rationale for MOU: Trust Builders and Honest Plumber recognize that an opportunity exists with significant financial benefits to be gained in remodeling the home of Mr. Big Shot. This MOU establishes ways for working in partnership to land the job and complete it successfully.
Parties to MOU: This MOU is between Trust Builders of Hometowns, USA, a Hometown, USA Corporation and Honest Plumbers, a sole proprietorship of Joe Smith, doing business as Honest Plumbers.
Aim of the MOU: The aim of this agreement is to combine the experience and reputation of Honest Builders with the access made possible to Mr. Big Shot by Joe Smith’s personal relationship with this potential customer to present a proposal for a negotiated contract for remodeling Mr. Big Shot’s kitchen and bath.
Agreements: John Smith agrees to recommend and introduce Trust Builders to Mr. Big Shot as the best remodeling contractor in town. Should Mr. Big Shot decide to award Trust Builders the remodeling job, then John Doe agrees to subcontract all plumbing work to Honest Plumber.
Objectives:
Work cooperatively to design and present a turn-key remodeling proposal that exceeds Mr. Big Shot’s expectations and secures the bid.
Status of this Document: This document is a statement of intent, and not intended to operate as a binding legal document on the parties or to create legal relationships between them. The management of each company remains independent.
Signed: John Doe, Trust Builders; Joe Smith, Honest Plumbers
If the project was more complex, or had multiple participants, the MOU would outline clearly the roles of each. If profits were split on a percentage basis, then these would be outlined, too. You could make the document legally binding, if you wanted to, but I generally don’t. I have never profited from a legal battle, and I believe it’s best to cut your losses and part ways quickly and easily when your understanding becomes … well, a misunderstanding.
Should John and Joe, my fictional builder and plumber, develop such a good relationship they want to join their companies and become a bigger and better entity, then those dense, complex legal agreements become necessary. But I have used the simple MOU for many, one-project ventures and found this simple and direct agreement works very well between trustworthy and honest people.
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