When it’s time to sell your business, these clauses (or absence of them) in your ‘critical’ customer and supplier contracts can be potholes on your path to a done deal. What’s the issue? You need to assign the benefit of the contracts to the buyer, without having to go to each party, and get written consent, or worse, go hat in hand to renegotiate the terms.
This is particularly important where you have a contract with a customer promising ongoing purchase of goods or services (recurring revenue) or with a supplier promising future goods or services at preferential pricing. Commercial leases with your landlord are another example, particularly where you have a rent rate that is below current market.
These clauses can impact timing, cost, and the parties’ ability to consummate a “smooth” transaction, particularly when a large portion of a target company’s value is in the contracts sought to be acquired.
This underscores the importance of long-term strategic planning. When you are entering into, or renewing, contracts with third parties, you should have an eye toward what future buyers may need or want. Whether or not consent is required to assign the contract may depend on how the sale transaction is structured, the language of the clause in the contract with the third party, or both. Negotiating non-assignment clauses is not a black or white exercise; often a happy medium can be struck by carefully drafting the circumstances and procedures by which assignment may be consented to in a prompt and reasonable manner.
Again, as is the case with most things in M&A transactions (and life for that matter), addressing the issue at the formation of the relationship is far less costly than at the 11th hour. Even if the third party ultimately agrees to the assignment, it often comes at the cost of a negotiated concession (e.g. a monetary payment or rate increase, or the release from a key obligation or restriction such as exclusivity). With some advanced planning, we can keep the air in your tires and avoid any pit stops on the road to successful transaction.