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Selling your business – The impact of customer contracts

By Peter Kroeger

Having built up your business over many years you have finally made the big step and decided it’s time to hang up your boots.

You have a buyer and an offer has been made and accepted and now the due diligence process is under way. You are becoming increasingly frustrated by the questions you are being asked but, through gritted teeth, you have gathered together all the information and provided it to the other side.

The hardest part was finding all the contracts with your customers and suppliers, making sure they were signed and current, but you got there in the end and gave yourself and your team a metaphorical pat on the back.

One of the questions asked was:

  • Are there any “change of control” provisions in any contract with a customer (or a supplier) such that the contract can be cancelled by the customer (or supplier) if they wish if the ownership in the company changes?

And this is the point at which you realise you have a problem. There are two such contracts with your major customers and you have to disclose this to the Acquirer. You don’t think this should be a problem, after all you have dealt with these customers for years and why would they change?

Why indeed? The key point is to note that, invariably, the Acquirer is being advised by investigating accountants and lawyers and they are painting a vision of what the business would look like in a year or two if these customers decided to go elsewhere. So they want to change the agreed deal to take account of this risk either by seeking an indemnity or by holding back some of the purchase price for a year or two or until those contracts are renewed by the new owners.

In the meantime, you are between a “rock and hard place”. Your options are not easy; you can walk away from the deal, or you can accept the change to the deal or to the structure of the deal, or you can try and negotiate that to be less advantageous, or you can try and get these customers to agree to a change in the contracts or even to introduce the prospective acquirer and hope they will allow the contract to continue.

The lesson is, long before you start a sale process, do look at all your contracts and, where you see a change of control clause, do try and negotiate it out at the next contract renewal. You will have much more chance of getting this clause removed when you have a track record of excellent performance and no time pressure to get the contract changed.

I will deal with more such sticky issues in future blogs.

Please feel free to get in touch with Peter Kroeger for more information.

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