Why master service agreements are essential for successful business relationships

Master service agreements (MSAs) are contracts designed to save time by laying out the basic terms that both businesses agree to abide by when working together. They don't guarantee that the companies will do business, but they set the ground rules for how their business relationship will work if they do decide to contract with one another.

Having an MSA in place makes it simpler and easier for companies to negotiate the details of future transactions because the basic terms have already been agreed to. In high-dollar deals, they are essential.

That was certainly the case at SellMax.

"Having a master service agreement was one of the most critical factors in our scaling," says Sean Pour, co-founder of the car-buying service. "I would say it was responsible for an approximate 70% increase in business," he says, because the company could operate at a much faster pace. "We would not have been able to recruit so many individuals to come and work with our team nationwide otherwise."

SellMax works with tow truck drivers to facilitate picking up vehicles and bringing them to SellMax locations. "The master service agreements that we have in place allow us to operate without negotiating every step of the way. This would take up too much time," he says.

Master service agreements "save us the burden of constant negotiation and confusion," says Pour. SellMax's MSA defines the rates the tow truck drivers will be paid based on mileage, how long they have to complete a given assignment, and where they should deliver the vehicle. It also indicates when payment will be made, "so there is no confusion from either party," says Pour. "I'm certain we would not be able to run a nationwide service without them."

What is included in a master service agreement?

The contents of an MSA can vary by company, industry, field, and situation, but often address some or all of the following terms:

• Payment. When will payment be made? How? Is there a standard rate to be used?
• Delivery requirements. When will delivery be made, by whom, where, and how?
• Geographic scope. Is there a territory or geographic boundary within which this agreement will apply? Is there a specific location at which employees will do the work?
• Standards of performance. Both parties spell out what they will consider to be acceptable work, such as a maximum defect rate, for example.
• Intellectual property ownership. Who will own any patents or intellectual property that result from the working relationship?
• Dispute resolution. When disagreements occur, how will they be resolved? Arbitration? In which state will the courts make the decision, if necessary?
• Indemnification. If either company is sued, who is ultimately responsible?
• Warranties. What are the scope and coverage included in the warranty?

It's always a good idea to have an attorney review an MSA before it is signed, to ensure that the company's interests are fully protected.

The pitfalls of operating without an MSA

Jesse Silkoff learned the hard way why having an MSA is essential to a growing business.

As the co-founder and president of MyRoofingPal, which is an online marketplace that connects homeowners in 4,000 U.S. cities with reputable residential and commercial roofers, Silkoff initially operated with individual contracts, which proved to be a big mistake.

"When I started my business, I made use of several different contract agreements from different sources," Silkoff says. "This led to a lot of headaches down the line when legal wording wasn't consistent, or when a particular template wasn't aligned with what I wanted for my company."

In one instance, a contractor who signed a temporary employment contract misunderstood how the individual contract had been worded and attempted to sue the company.

Since then, Silkoff is a strong advocate for carefully worded MSAs.

"The decision to adopt an MSA was a necessity, in the end, and a measure I'm very glad I took," he says. "My business feels a lot more secure, and it's allowed me to make business deals and hires that I wouldn't have felt confident making in the past."

Preventing disputes with MSAs

Not only do MSAs help prevent misunderstandings, but they can also prevent projects from expanding beyond the originally agreed-upon parameters. Or so Colin Ma discovered as a digital marketing entrepreneur, through his software review site.

"MSAs massively help because when clients want more work, you can point out the relevant section and ask for more time and money, which I do when clients ask for work beyond the agreed-upon scope," says Ma.

"Without an MSA, there would be a lot more trust issues with clients and a lot of wasted time and money. Not having an MSA would hurt my revenue by about 20%," he estimates, based on potential lost time in communication and incoming revenue.

Any company negotiating a major deal with another organization should consider drafting a master service agreement to address the basic terms of the work. The more you can spell out in advance, the faster subsequent deals will move. That's especially important in fields like marketing, human resources, and finance, where relationships are often open-ended or ongoing.