Why it matters
Many commercial contracts give the other party a way out when the business they signed with changes hands. The wording varies. A change of control clause may let a customer end the contract if the company's shares are sold. A restriction on assignment may stop a contract moving to a new owner in an asset sale without consent. Or the contract may simply allow either side to end it on short notice.
How this plays out depends on the structure of the deal. In a share sale (a stock sale in the US) the company that signed the contracts stays the same, so most contracts carry on unless they contain a change of control clause. In an asset sale the contracts have to move to the buyer, which usually needs the other party's agreement to an assignment or a novation. Either way, the customer or supplier gets a decision point at the moment you are most exposed.
The risk is greatest where it overlaps with a large customer. A clause in a contract that brings in 30% of revenue puts that share of the business in someone else's hands. Similar clauses appear in supplier agreements, software licences, franchise and distribution agreements, and leases.
Loupe's valuation tool reduces the multiple by 10% at its starting settings when the transfer of leases, licences or key contracts is uncertain. The flag is usually fixable. Identify every affected contract early, ask for written consent or a waiver before completion, and make the most important consents a condition of completion in the sale agreement. Ask a lawyer to review the key contracts, because the effect of these clauses depends on their exact wording and the law that governs them.
A change of control clause gives the other party to a contract rights if the business changes owner, such as the right to terminate, renegotiate or refuse consent.
In an asset sale you buy selected assets of a business; in a share sale (a stock sale in the US) you buy the company itself, with its full history. The choice shapes risk, tax and what needs consent.
How to spot it
- The seller describes contracts as long-term but will not share copies until late in the process.
- Customers include large companies, public bodies or franchisors, whose standard terms often contain these clauses.
- Contracts include headings such as assignment, change of control, change of ownership or termination for convenience.
- Some contracts are in the owner's personal name rather than the company's.
- Important customers are on rolling terms with short notice periods.
- A major contract is due for renewal or retender around the expected completion date.
Questions to ask the seller
- Which contracts contain change of control, assignment or termination for convenience clauses?
- Which customers, suppliers or licensors would need to agree to the sale?
- How have they responded to similar requests in the past?
- When would you be willing to approach them, and who would make the approach?
- Are any key contracts due for renewal or retender in the next 12 months?
- Would you agree to make consent from the most important counterparties a condition of completion?
Documents to request
- Copies of all customer, supplier, licence, franchise and distribution agreements above an agreed value
- A contracts schedule showing each contract's term, renewal date, notice period and any assignment or change of control wording
- Any consents, waivers or correspondence from earlier changes of ownership or structure
- Revenue by customer for the last three years, to size the exposure
- The lease and any landlord consent requirements
- Framework or panel agreements with public sector customers, where relevant