Often, one of the most valuable portions of a business is its contractual relationships. It could be with contracts with customers, a key supplier, vendors, or strategic partners. In such cases, when a seller decides to sell its business, the buyer may expect for those key contracts to be assigned to it at closing (so that the buyer can benefit from the contractual relationship).
Generally, contracts may address the issue of assignability in a few different ways, including:
The contract might be silent on the topic (in which case, state statutory or common law will dictate how the contract might be assigned)
The contract might explicitly prohibit assignment without the other parties prior consent.
The contract might be freely assignable (in which case, the assigning party may need to provide notice to the other party of the assignment).
The contract might provide for assignment, provided certain conditions are met.
Often, in a M&A transaction, the buying and selling parties will need to obtain consents to the assignment from the other party to the contract. In fact, many times, obtaining certain consents may be a condition to close the transaction (i.e., if you can’t get the consent, the buyer may not close the transaction). We have seen deals fail to close because the other party to the contract would not consent to the assignment. Likewise, in many cases (unless there is a really strong relationship between the seller and the other party to the contract), the other party to the contract doesn’t have the same sense of urgency to provide it’s consent to the assignment. In such cases, we have seen closing be held up for months while the parties attempt to get consent to the assignment.
What can you do about this now?
This can be an easy thing to plan for, in many cases. You can start by changing your template contracts now and, going forward, use a contract with a more-favorable assignment clause to you. For example, you might want to provide that you can assign the contract upon a change of control (whether by asset, stock sale, merger, or otherwise) by providing notice to the other party. Having such a provision in your standard agreements can make the deal process “smooth sailing.” In addition, it takes out the “counterparty risk” (i.e., the risk that the party to the other contract doesn’t consent or takes a long time to do so).
Of course, this is easiest to implement when you have bargaining power. For example, if you have many customers, none of which make up a significant portion of your revenue (i.e., you don’t have high customer concentration), then you certainly want your customers to agree to this.
But, as you can imagine, this may be more difficult in cases where the other party to the contract has more bargaining power. For example, if the other party is a big company (and you are a small account to it), it may be difficult to negotiate these terms in. But, it’s always worth asking (especially if there’s a transaction anywhere in the (near) future.
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Let us help. Doida Law Group understands the complexities and nuances that go into negotiating contracts among a variety of high-stakes business situations. We have proven processes in place that provide price certainty and optimal results for all parties. How can we help you today?