Does your company have significant vendor or sales contracts that drive a majority of your company’s recurring revenue? If so, a review of each of those contracts is absolutely necessary if you’re thinking about selling your company within the next few years. The terms of those contracts can often mean the difference between a successful sale of your company and a buyer getting cold feet and walking away, or cutting the purchase price to the point that it’s you that is forced to walk away from the sale. In particular, whether or not the contract is assignable is incredibly important to buyers.
You may be asking yourself, “if someone is buying my business, why does it matter if the valuable contracts I have in place are assignable?” It’s because the vast majority of buyers want to buy the assets of your company, including your company’s contracts, not the stock (or membership units in the case of an LLC) of your company’s owners. There are sound tax and liability exposure reasons for the preference to buy your assets that we will not cover here, but if you cannot convince a buyer to buy your equity instead of your company’s assets, the assignability of your contracts is critical. Here is a simple example of the magic assignment language your buyer’s attorney will be looking for:
Assignment. Contractor/Vendor/Company may assign any of its rights hereunder without the prior written consent of the other party.
Prior to becoming a deal attorney, I worked as a middle market investment banker in the Midwest and one of the firm’s clients was a waste management company that had started with a single trash truck and built itself into a highly profitable small business. Their business model of outbidding the larger national firms for small municipal contracts in the fractured local market in which they operated made them more than just an annoyance to the large national firms aiming to consolidate their hold on the market. As a result, our client decided to go ahead and sell to a larger competitor who was willing to pay to get them out of the market. We worked for several months to assemble a pitch deck, market the company, and gather a host of very strong bids from the national firms along with private equity firms for the company. We had requested the company’s contract with the landfill, but it was one item they kept failing to send for one reason or another. It wasn’t until we had letters of intent on the table that we found out why; the company’s owners were best friends with the prior owners of the landfill and had entered into a below market dumping arrangement with the landfill. Unfortunately for our client, the landfill had been sold to a larger corporate entity and the assignability clause in the original contract didn’t allow the waste management company to assign the contract to a new owner or have a change of control. Our seller was essentially locked out of selling their company and would likely lose their competitive advantage the minute the sweetheart landfill contract expired. They were left with an at-risk company, with no buyer.
That was a lesson well learned early on. It is extremely valuable for a company to negotiate the right to assign their contracts to a buyer of their assets. Vendor and sales contracts are equally important, especially if they have favorable pricing from vendors because of relationships or sales volume. Hiring a deal attorney to do a pre-sale checkup 1-3 years prior to when you want to sell your company can help avoid issues like this; the contract terms may be able to be re-negotiated in advance of a sale. Further, keeping the attorney you have engaged to represent you in the sale of your company fully informed and not in the dark on negative aspects of your company can make the difference between closing a deal for a price you feel is favorable and losing a deal or selling for your business for less than you had hoped.
If you’re thinking about selling your business in the next few years, Hunter Business Law can help position you for maximum ROI on your investment of time and money and avoid roadblocks to the sale. To arrange a consultation, visit our contact us page HERE.
This blog was written by Hunter Business Law Attorney David Kronenfeld.