When selling a business, often a key component is the contracts to which the company is a party. They may be contracts with customers, which include the company’s revenue, contracts with vendors, or various licensing agreements that allow the company to operate. It could involve a lease for a particularly favorable location or on particularly favorable terms. A company’s contracts are often an important part of a business, adding substantial value. Ensuring the transfer of any such contracts can significantly improve the structure, timing and end result when selling your business. Not being able to assign important contracts to the buyer will have an adverse, if not fatal, effect on the business sale.
Examine Your Contracts
The first thing to do is to examine your contracts to determine whether they are freely transferable. Just like other assets your company may hold, it’s fairly likely that they are. But this isn’t a rule; there are exceptions. A contract may include a non-assignment clause, which may prohibit transfer of the contract; or place certain limitations on the transfer, such as requiring the approval of a third party.
The intention is to make sure that all of the contracting parties have control over whom they’re doing business with. The standard non-assignment clause will include language saying that the agreement cannot be transferred without the other party’s written consent. The clause may also include language saying the other party’s consent can or cannot be unreasonably withheld.
Where the consent of third parties is required, the timing of procuring such consents must be considered. The contracts themselves may specify when consent must be obtained. In some cases, necessitating several weeks which would allow the remaining party to assess whether to provide consent or not. There can also be expenses associated with obtaining consents from third parties. This is often the case where landlords will want to review, among other things, the financial strength of the purchaser.
There’s also the issue of confidentiality. The seller will certainly want to keep news of the sale confidential for a variety of reasons. Being required to obtain consent of third parties, will the other party in the contract agree to keep the matter quiet?
Both buyer and seller will also want to consider the impact of any consents not being obtained, especially if such contracts are material to the business. Because of these various issues, it is important to review any contracts that will be transferred or remain with the new owner early in the process and discuss how any required consents will be obtained.
Ultimately, when initially drafting and negotiating contracts with customers or vendors, each contract should be carefully reviewed considering the potential implications an assignability clause will have upon the sale of your business. Understanding the nature of non-assignment provisions and the ability to structure around these provisions will help make a future sale process go smoother and quicker.
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