How to Build Incentives into a Business Transaction

When putting together an agreement or a contract for a business transaction, you may want the other party to have more motivation than just fulfilling the deal and getting compensated. Incentive structures can be very beneficial in certain situations, but they must be properly formulated and legally enforceable. Take a look at what should go into building a solid set of incentives for a transaction.

1. Get Advice from an Attorney 

The odds that a contract is going to hold up to legal scrutiny drop when the deal wasn't written with the benefit of counsel. If you don't already have an attorney who provides business transaction law services, find one. Tell them what your contract is about and how you're trying to use incentives to sweeten the pot. They can then help you navigate some of the following issues.

2. Clarify the Scope

One of the key factors in enforcing any contract is to ensure that the scope of the deal is clear. In legal terms, scope covers things like the timeframe for the arrangement, what situations it applies to and even what jurisdictions the deal will be effective in. It's also wise to make sure the scope is tightly limited. You don't want to have another party suing you for incentives that weren't paid only to find out the contract lacked sufficient limits on when the incentives could be claimed.

Likewise, be aware that anything unreasonable in scope is grounds for a court to rule against you. If an incentive were worded to virtually prevent its attainment, for example, that's an argument for ruling you or possibly even nullifying the entire deal.

3. Be Specific

Particularly when putting incentives into a deal, there is no such thing as being too legally specific. Suppose you wanted to make arrangements for a shipment of goods from Los Angeles to New York City. The contract should name the nature of the goods, any acceptable substitutes, and limits on substitution options. Likewise, the point of delivery should be named, as should the mechanism for accepting the delivery. Whatever little bits of information better explain what would make you happy enough with the delivery to pay out the incentives, include them.

4. Offer Valuable Compensation

For an incentive to be of any legal worth, it must also be a thing of value. In addition to cash payments and negotiable instruments like checks, the courts recognize goods traded in kind, shares of stock, property and even actionable information as things of value.

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