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Depending upon the nature of the business you are selling, contracts are part of due diligence for a potential buyer. If your business rarely enters into customer contracts, you can stop reading… this won’t apply to you.
But, if you enter into contracts with customers (or even vendors) for a longer-term delivery of products or services, the potential buyer will probably want to assume them as part of the assets being purchased.
And those so-called
longer-term contracts may require special attention before you can transfer them to a buyer. Don’t wait until due diligence begins… this is one of those pre-sale review items that are useful to get on top of in advance.
One of the contract provisions to consider is the “assignment restriction” clause, usually buried way in the back, a few paragraphs up from the signature line.
Here is an example of what you are used to seeing (or not, as the case may be, if you routinely ignore what used to be called boilerplate):
Assignment.
This Agreement and any portion thereof may not be assigned or transferred without the prior written consent of either Party.
In negotiating this restriction (if we ever did 10 years ago), large companies routinely added an exception such that a small business customer could not assign a contract to an acquirer of its assets without large company’s prior written consent. If the smaller service provider attempted to object or even just make it mutual, the response was usually a flat “no.”
Nowadays, however,
we have started to see more fair and equitable mutuality in contracts and, either in the first draft or by negotiation, here is what you are more likely to see (and certainly want to see):
Assignment.
This Agreement is not assignable by either Party, whether by operation of law or otherwise, without the prior written consent of the other Party (which shall not be unreasonably withheld, delayed or conditioned); provided, however, that either Party may assign this Agreement (i) to an affiliate of the transferring Party or another entity owned or controlled by the transferring Party, or (ii) as part of a transfer of all or substantially all of the assets of the transferring Party to any party (so long as such transferee acknowledges and accepts responsibility for all obligations of such transferring party hereunder), by providing written notice of any such assignment to the other Party. Any purported assignment in violation of this provision shall be void and of no effect. Any permitted assignee shall assume all obligations of its assignor under this Agreement.
So, what’s the difference and how does it affect you in a sale?
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First, it minimizes the concern a buyer might have as to whether the buyer will receive and benefit from all of the seller’s contracts. After all, as I have often said, they are the lifeblood of a service provider’s business and key to valuing the seller’s assets in a sale.
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Second, assuming the seller’s contracts do not all contain a 30-day convenience termination provision (we will save that for another newsletter), the buyer knows that, post-closing, the customers then under contract will continue to provide the projected and expected stream of revenue.
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Third, notifying parties of an assignment is always an easier “sell” than asking in advance; it just makes for a smoother transition process. “Never complain, never explain” was Benjamin Disraeli’s philosophy and it is akin to the assignment process. Just do it!
The next time your lawyer suggests negotiating the so-called “boilerplate” contract assignment restriction, I recommend listening to her.
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