Most buyers assume that the customer contracts come with the business. Many do. Some do not, and you will not know which unless somebody reads them. A clause nobody remembers can allow your largest customer to terminate, renegotiate, or demand consent on the day you close.
This is not a legal technicality. It is a revenue question, and it belongs in the integration plan as much as the deal. It also connects to the early work in the pre-close checklist and seller transition plan.
What the clauses look like
Look for four types. An assignment clause that requires the customer's consent to transfer the contract. A change of control clause that gives the customer a right to terminate or renegotiate if ownership changes. A notice clause that requires you to tell the customer within a set period. And a termination for convenience clause, which lets the customer leave on short notice anyway.
Asset deals and stock deals can treat these clauses differently. In a stock purchase the company stays the same legal party, but a change of control clause can still apply. In an asset purchase, contracts must usually be assigned. Ask counsel which applies to your deal.
Review the contracts by size and by risk
Start with the top customers by revenue, then the contracts with the longest terms and the most unusual language. Build a table: customer, revenue, term, renewal date, assignment, change of control, termination, and pricing commitments. Counsel reads the clauses. You decide what matters.
Do not forget oral arrangements and purchase order based relationships, where there may be no written contract at all. In those cases the customer can leave at any time, and the risk is relational rather than legal. For the relational risk on your largest accounts, go to customer concentration after acquisition.
Plan the consent conversations
For each contract that needs consent, decide who asks, when, and what you offer. The seller often asks best, since they know the customer. Ask before closing if the deal terms allow, and make consent a condition for the large ones. A customer asked early, with respect, usually agrees. A customer asked late, under pressure, may use the moment to renegotiate.
Be ready for the request that comes with the consent: a price change, a longer term, a better service level. Decide your limits in advance.
When consent is not given
Have a plan. Options include a price adjustment in the purchase agreement, an escrow or holdback tied to the contract, a transition arrangement where the seller continues to serve the customer, or walking away from the contract. Each carries a cost, and each is easier to negotiate before closing than after.
The supply side has its own version of this problem; see vendor contracts that end on a change of control. A supplier can have rights that matter as much as a customer's. I would rather ask a customer for consent early and respectfully than discover the clause when they use it.
Sequenced list: contract review for change of control
Complete during diligence. Each step has an owner.
- List customers by revenue and mark those with written contracts. Owner: finance.
- Collect contracts, amendments, and side letters for the top accounts. Owner: the deal lead.
- Have counsel flag assignment, change of control, notice, and termination clauses. Owner: counsel.
- Build a table of risk by customer: revenue, term, renewal date, and what each clause allows. Owner: finance, with counsel.
- Decide which consents are conditions to closing and which are tracked after. Owner: the deal lead.
- Plan each consent conversation: who asks, when, and what you will offer. Owner: the sales leader.
- Track every consent and notice to completion on the integration tracker. Owner: the integration lead.
What to bring to the consent conversation
Bring a short, plain letter, a named contact, and a reason for the customer to say yes. The letter says who is buying, what stays the same, and what the customer gets: continuity of service, the same people, and the same terms. The named contact is a person the customer already knows.
Expect questions about financial strength, insurance, and who is accountable. Have answers ready, along with certificates and references if needed. Customers consenting to a new owner are really asking whether the new owner will keep doing the job. Show them how.
A note on timing
Notice periods run on the calendar, and some are measured from signing, not closing. Missing a notice deadline can hand the customer a right you could have avoided. Put the dates on the tracker the day the contracts are reviewed.
Do not wait for the customer to raise it. Customers who find out about the sale from a third party, and then discover that the contract needed their consent, are customers with a grievance. Tell them first. It sits inside the wider customer plan in customer retention after acquisition.
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Questions
Do customer contracts transfer automatically when a business is sold?
Not always. Depending on the contract and whether the deal is a stock or asset purchase, a customer contract may require consent to assign, give the customer a right to terminate or renegotiate on a change of control, or need notice within a set period. Have counsel review the top contracts during diligence and plan consent conversations early.
What is a change of control clause?
A provision that lets the other party terminate or renegotiate if ownership of the company changes. Whether it applies depends on the wording and the deal structure.
Who should ask the customer for consent?
Often the seller, since they know the customer, with you in the room. Ask before closing where the deal allows.
What if there is no written contract?
Then the customer can usually leave at any time, and the risk is the relationship. Prioritize those accounts in the retention plan.