Selling a Business Part III: Button Down Existing Relationships Before Negotiating

In addition to your financial and personnel records, a potential purchaser of a business will also want to closely examine the state of the contractual relationships with external third parties including key suppliers, licensees, landlords and of course customers.

The first fundamental question is ‘are the contracts up to date’.  It is not uncommon for a business relationship to carry on even when the contract between the parties has lapsed.  This can often be the case when there is a strong working relationship and level of trust between the parties, which for obvious reasons will not necessarily apply when a new owner takes over.  This will be an instant red flag to a potential purchaser who will fear that a change in ownership will mean a change in terms.   Just as contracts with suppliers can carry on after they have expired, so too can contracts with key customers.  If these have expired they must be re-signed before hanging out the for sale sign.

The second fundamental consideration is the assignability of the contracts in question.  It is very common for joint-venture agreements, licenses, leases and other material contracts with customers and suppliers to contain clauses preventing assignment to a third party, without the express written consent of the other party to the contract. This may be true even in s share transaction as a change in control in the Seller will be deemed to be an assignment for the purposes of the contract in question. Contracts with such restrictions should be identified and steps taken early on to ensure that a reluctant party doesn’t jeopardize the ultimate transaction from being completed in a timely manner or at all due to some unwarranted demand in exchange for the consent required.

If a contract has expired a business owner in the midst of negotiations to sell may be required to back peddle in order to get a new contracts signed and agreed upon in a timely manner.  But what happens if the other side is not in a hurry or uses the urgency of the business owner as a negotiating tool?  Playing catch-up is never a comfortable feeling for a business owner who is trying to sell. It is a prudent business practice to maintain and regularly review a detailed list of all material business contracts and their terms to ensure they will not impede your ability to successfully conclude your exit strategy on your terms.

Don Burke