Most owner-managed businesses are built on relationships long before they are built on paperwork.
A trusted supplier who has been there since the early days. A consultant who understands the business without needing much explanation. A partner who knows what the deal is, even if it was never written down. A client relationship that has worked smoothly for years without dispute.
In the early stages, this kind of informality feels not only efficient, but appropriate. It keeps costs down. It speeds things up. It reflects trust. For many founders, it feels like proof that the business is being run on character rather than bureaucracy.
The difficulty is that what works when a business is small rarely survives contact with growth.
As SMEs scale, these same informal arrangements quietly become one of the most common sources of commercial, intellectual property, and governance failure. Not because people suddenly become dishonest, but because circumstances change. Pressure increases. Money becomes more significant. Roles shift. Expectations diverge. And the agreement that once “worked” no longer fits the business that now exists.
This issue has become particularly acute in the current South African context. SMEs are operating in an environment where margins are tighter, cash flow pressure is constant, staff turnover is higher, and collaboration across borders, platforms, and independent contractors is far more common than it was even a few years ago. At the same time, many businesses have reached a size where work is delegated, founders are no longer involved in every decision, and systems begin to replace memory.
In that environment, informality stops scaling.
What once felt like flexibility becomes ambiguity. What once felt like trust becomes exposure. And when disputes arise, the fact that “we never had a problem before” offers very little protection.
The problem with handshake deals is not that they are automatically invalid. The problem is that they are fragile. They are difficult to prove, easy to misunderstand, and rarely aligned with how the business has evolved over time. An agreement reached when the business was small tends to freeze assumptions at that point, even as the business itself changes. Ownership and responsibility become blurred, particularly where intellectual property, revenue sharing, or decision rights are concerned. And when pressure arrives — through funding discussions, pricing disputes, performance issues, or exit conversations — the absence of clarity becomes impossible to ignore.
By then, it is usually too late to fix cleanly.
In practice, exposure tends to cluster in predictable places. Contractors and consultants often contribute core value to growing businesses, particularly in areas such as development, design, marketing, or strategy. Without clear written terms, ownership of what they create becomes uncertain, reuse rights are contested, and termination of the relationship becomes unnecessarily complex. Many SMEs only recognise this risk once a relationship ends badly.
Business partners and collaborators present similar challenges. Joint ventures, channel partnerships, and so-called strategic alliances are frequently agreed informally, often driven by opportunity rather than structure. As revenue grows or priorities shift, unresolved questions surface. Who controls the relationship? Who owns what was created together? Who carries which risks when things go wrong? Without documentation, these questions tend to be answered by whoever has the most leverage at the time.
Long-standing customer and supplier relationships are not immune. Pricing arrangements evolve. Scope creeps. Performance expectations shift. What was once “understood” becomes contested, particularly when staff change on either side. The longer the relationship has existed without clarity, the more difficult these conversations become.
Ironically, founders themselves are often the least protected. Equity promises, profit-sharing arrangements, decision-making authority, and exit expectations are frequently assumed rather than documented. These assumptions hold until the relationship is tested, at which point the absence of clarity becomes deeply personal as well as commercially damaging.
The risk is amplified when intellectual property is involved. South African intellectual property law is formal about ownership and assignment. Bodies such as the Companies and Intellectual Property Commission record rights; they do not infer them. If a business relies on its brand, its proprietary content, its systems, its software, its data, or the processes that differentiate it, ambiguity about who owns or may use those assets is not theoretical. It becomes very real during due diligence, funding discussions, licensing negotiations, or disputes. Informality erodes value quietly, until someone tries to rely on it.
This is also, at its core, a governance failure. Many founders think of contracts as purely legal instruments. They are not. They are governance tools. They align expectations, allocate authority, and manage risk before it escalates. The principles reflected in the King IV Report emphasise accountability and clarity regardless of company size. Handshake deals undermine both. They concentrate knowledge and control in individuals rather than in the organisation, making the business fragile when people leave, roles change, or relationships sour.
The solution is not to turn SMEs into paperwork factories. It is to become more deliberate about which relationships deserve clarity. A useful test is to ask what would happen if a particular relationship failed tomorrow. If the business would be materially impacted, informality is already a risk. Trust and structure are not opposites. You can trust someone and still document the arrangement. In fact, good documentation often protects trust by preventing misunderstandings later.
Effective SME contracts do not need to be complex. They need to be proportionate, written in plain language, and aligned with how the business actually operates. They should make clear who does what, who owns what, who decides what, and what happens when circumstances change. They should also be revisited over time. Agreements made years ago may no longer reflect the current scale, revenue realities, or risk exposure of the business. Updating them is not a sign of mistrust. It is a sign of maturity.
The same mistakes repeat themselves across growing businesses. Founders tell themselves they will deal with documentation if it becomes an issue. Templates are used that bear little resemblance to reality. Agreements are only put in place after disputes arise. Contracts are overcomplicated to the point that no one reads them. And documentation is treated as a legal formality rather than a business tool. Each of these choices allows risk to remain alive.
Informality helps SMEs start. It does not help them scale.
The businesses that endure are not the most trusting or the most cautious, but the ones that recognise when assumptions need to be replaced with clarity. Handshake deals do not fail because people are dishonest. They fail because growth changes the rules, and the agreement never kept up.