When a business changes hands, contracts don’t automatically come along for the ride. For owners planning an exit, overlooking this reality can derail a deal—or significantly diminish its value.
As an example, the owner of a Southeastern packaging company that I know lost a $4.8 million sale after its largest customer—accounting for 38% of annual revenue—refused to consent to a contract assignment. The buyer walked. Six months later, the business finally sold for $3.9 million to a different buyer under less favorable terms. The seller called it a “million-dollar lesson in fine print.”
This situation isn’t rare. Many small and mid-sized business owners are unaware that contracts—leases, service agreements, supplier deals, IP licenses, and even customer relationships—may not transfer to a buyer without explicit consent. And if you’re selling the business via an asset sale, as most small businesses do, the risk is even higher.
Why Contracts Don’t Automatically Transfer
There are two primary ways to sell a business: an asset sale or a stock (or equity) sale.
- In an asset sale, the buyer purchases specific assets and liabilities but not the legal entity itself. Contracts must be assigned, and that usually requires consent from the other party.
- In a stock sale, the legal entity remains intact, and the buyer simply acquires the shares. Most contracts remain in place—but beware of change-of-control clauses that can trigger a termination right or require approval.
The Legal Language That Matters
At the heart of the issue are two types of provisions:
1. Assignment Clauses: These determine whether a contract can be transferred. Many contracts prohibit assignment without written consent. Some are silent, but even then, courts in many states may still require consent for contracts involving personal services or unique performance.
2. Change-of-Control Clauses: Even in a stock sale, some contracts treat a change in ownership as grounds to terminate the agreement unless prior approval is obtained.
Facility leases can be particularly problematic. A restaurant group that I know of attempted to sell two locations as part of a broader exit strategy. The buyer loved the numbers—but balked after seeing that both leases required landlord approval for any assignment. One landlord approved; the other did not. The buyer demanded a $200,000 discount, citing the risk of losing the site. The seller, cornered by timing, accepted.
Action Plan: How Owners Can Prepare
Most of the risk around contract transferability can be mitigated—if addressed early. Here are some steps you can take:
- Start With a Contract Inventory: Create a complete list of contracts the business relies on.
- Review Assignment and Change-of-Control Language: Identify contracts that prohibit assignment or include automatic termination.
- Begin Informal Conversations With Counterparties: For key contracts, initiate dialogue 6–12 months before a sale.
- Where Needed, Renegotiate: Consider renegotiating or replacing restrictive contracts.
- Prepare a “Contracts Summary Sheet”: Include key terms, assignment rules, and renewal status.
- Work With Legal Advisors: Use tools like consents, novation agreements, or restructuring.
In the sale of a business, every contract is a potential asset—or liability. By proactively reviewing and managing your agreements, you’re not just making your business more attractive to buyers—you’re preserving its value.
Ignore this, and you might end up negotiating with your landlord, lawyer, and largest customer at the 11th hour. Handle it early, and your contracts will work for you, not against you.