By Geoff Ling, MBA
We find that many clients need to scramble to chase down contracts when it is time to set up a data room, which can obviously delay the sale process, disrupt the business and arouse suspicion. Setting up a centralized filing system a year or so in advance is a smart investment. It’s also a good idea to create a spreadsheet to keep track of when each contract expires so it can be renewed as appropriate. Obviously, it is also important to make sure that all contracts are dated and are signed by both parties.
Clients tend to focus on the more financially important contracts (typically with customers, suppliers and landlords), but often overlook contracts for miscellaneous items such as postage machines, forklift trucks, janitorial services, software subscriptions etc. Most buyers will agree to exclude smaller contracts from the scope of due diligence (which can be defined as those contemplating transactions less than $50k per year, for example).
If you have been doing business on handshake agreements, now is a good time to document the more economically significant business arrangements.
As you negotiate new contracts, we recommend paying attention to the assignment provisions. Ideally, your contracts should be assignable without the consent of the counterparty, and the counterparty should not have the option to terminate the agreement in the event of a change in control. Onerous assignment provisions usually aren’t dealbreakers, but they can prolong the sale process.
We publish tips for business owners planning a sale to ensure a smoother process, more offers, and ultimately a higher valuation.