We sign up for things, “Terms and Conditions” page pops up, we just hit “Agree” without perusing the said terms, not knowing the rights that we are giving away.
We get so excited at the prospect of a deal that we miss or overlook the salient details that can spell doom.
This seemingly inconsequential habit being a consequence itself of laziness can graduate into corporate complacency and permeate into the very fabric of our business doings.
Put simply, business owners especially we of the SME Cadre do not pay close attention to “Terms of Contract” and “Due Diligence”, and this is our Achilles heel.
Well-structured business deals and models can be ruined by these, This happened to us.
Before I tell the short painful story, for my readers who are in a hurry, know this before you go.
“Contracts are only valid to the degree that parties involved are willing to stick to it”, often there is a “lie or misrepresentation of the truth” in the position of a party, more often than not a party wants to play a fast-one or has an ace up their sleeves”. So “Trust but verify”, Now you can go, that’s the lesson.
For those of you still here and want to know the painful story, hang on, but first, you need to have read my previous article “The Power of Models 2”, read HERE so that you can follow the story;
The Failure of that business model we developed came from two sources.
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- The Contractor with the “Line of Credit”
- A default term in our instalment-payment purchase contract
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The contractor’s deliverable in the model is for the company to use its line-of-credit to commence the project to a development level that will encourage our off-takers to buy in, their return is a Unit of the project (which cover the investment and then some returns), All that was required was for us to pay an equity contribution which was 10% of the total cost of units developed to first slab/decking.
We signed the contract and paid our equity contribution, there was a little movement on site as the contractor mobilized to the site, little did we know that it was our funds they just used to come to the site, there was no line of credit, they were banking was to market and sell their unit off-plan as soon as they use our equity contribution to mobilize. We didn’t discover this until about four months into the project, then it was too late as our means of financing the land purchase hinged on getting funds from off-takers whom we were assured would buy once they saw progress on site, we had a very good location, so it was a no-brainer. We would have done our “Due diligence” by asking for proof of funds or evidence of the line of credit, we just trusted the CEO of the company who was a personal senior friend.
We saw the default term in the contract which stated that if we missed two consecutive payments the landowner reserved the right to revoke the contract and hold on to any deposits we made, it was a shrewd contract, but we accepted it (we know better now) because we were assured of payments coming in once contractor is working, one of them had even made a commitment which we used to pay the first instalment for the land. During our discussions with the landowner, we had also developed a cordial relationship, in our naivety we believed that in the worst-case scenario, this would count, Boy! How wrong we were; The Landowner activated that default clause the very second month that we missed payment and claimed the downpayment we had made, we got a letter from her lawyers to that effect. Despite our pleas and the fact that we sourced and got funds for the outstanding two months, the landowner refused and terminated the purchase contract.
We lost 35 million naira! Because we didn’t get proper guidance on contractual terms and didn’t carry out due diligence on the contractor’s claims.
When I said it was a painful story, I meant it, now I am sure you can relate.
I have shared the lesson from this, but in case you didn’t catch it; Study all terms of a contract in detail, if there are clauses you don’t understand, seek legal guidance. Trust but verify and carry out due diligence no matter who the person is, in fact, the closer the person is to you the more careful you should be.
Do these as I have recommended, but above all know something that there is another factor that came into play here, I will summarize it in this statement, “Business is spiritual”, next week I will elaborate on this, and tell you what they won’t teach you in the best of business schools, but all top businesspeople know this, even those in other continents.
We go deep next week, stay tuned.
