A distribution right is the kind of asset that does not appear on a balance sheet. It is the exclusive territory for a product line, the license to use a software system, the authorized dealer status for a manufacturer. It may be the reason the business is worth what you are paying. And it may end the day the ownership changes.
Customers get most of the attention in diligence. Suppliers deserve the same. Do the review alongside the pre-close work in the pre-close checklist and seller transition plan; it uses the same logic as the customer review in customer contracts with change-of-control consent.
The agreements to find
Distribution and dealer agreements. Franchise or licensing agreements. Software licenses that are non transferable. Exclusive supply agreements. Equipment leases. Warranty and service agreements tied to a manufacturer. Government or utility program agreements that require approval of new owners.
Pull them from the files, and ask the seller what else exists. Some agreements live in a drawer because they were signed years ago and renewed by habit.
Read for four things
Does the agreement allow assignment? Does a change of control terminate it or give the other party a right to terminate? Does it require notice or approval? Does it include a non compete or exclusivity that affects your other businesses?
The last point matters in a buy and build. A supplier may grant exclusive rights on the condition that you do not also carry a competing line, and your existing company may already do so. Check both sides.
Ask the supplier early
For the agreements that matter, plan the approach. Decide who asks, when, and what you offer: financial strength, experience, a commitment to the brand, a plan for growth. Manufacturers care about who represents their product. A well qualified buyer is often welcome. An unprepared one may meet delay.
Ask before closing if the deal allows, and make approval a closing condition for the agreements that carry real value. After closing, you have far less leverage.
If the supplier says no
Options include renegotiating the price to reflect the risk, a transition period in which the seller keeps the license, an alternative supplier, or walking away from the deal. Each has a cost, and only the first two are available before closing.
Remember the cost of lost product lines to customers. If your technicians can no longer sell the brand the customers ask for, you have a customer problem as well. For the commitments that go with these agreements, such as volume minimums, read minimum purchase commitments you inherited. I would call the manufacturer before closing, not after.
Sequenced list: review supplier agreements for change of control
Complete during diligence. Each step has an owner.
- List every supplier, license, and distribution agreement, including those in drawers. Owner: the purchasing lead, with the seller.
- Rank by value to revenue and margin. Owner: finance.
- Have counsel read assignment, change of control, notice, and exclusivity terms. Owner: counsel.
- Check for conflicts with your existing agreements. Owner: the purchasing lead.
- Plan the approach to each supplier: who asks, when, and what you offer. Owner: the deal lead.
- Make approval a closing condition for the agreements that carry real value. Owner: the deal lead, with counsel.
- Track every notice, approval, and renewal date on the integration tracker. Owner: the integration lead.
A short case for early supplier calls
Imagine a service business that holds an authorized dealer status for two equipment brands. One brand's agreement allows termination on any change of control with thirty days notice. The buyer discovers this a week after closing. The manufacturer, which has another dealer nearby, suggests a transition period and then declines to continue.
Had the buyer asked during diligence, the manufacturer would have had weeks to evaluate the buyer, the buyer could have used the process to ask for a fair term, and the price could have reflected the risk. Asked after closing, the buyer has no leverage at all.
Ask early, ask respectfully, and bring what the manufacturer cares about: capital, trained technicians, a sales plan, and a clean history. Most brands want strong representation. They simply want to be asked before the news reaches them from someone else.
Why this gets missed
Diligence checklists lean on customers, employees, and financials. Supplier agreements sit with a purchasing person who may not be in the deal room. Ask for that person early and ask for the drawer.
A lost distribution right can erase the value you paid for. Check it before you sign. It is among the cheapest pieces of diligence there is, and one of the most useful.
One issue is never just one issue. If one agreement has a change of control clause, assume others do. For the platform view, go to integrating add-ons into a platform.
Get the 100 day integration tracker
The tracker puts an owner, a date, and a status on every integration task from pre-close to day 100, so decisions like this one get made on purpose and followed up.
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Questions
Can a supplier cancel the contract when a business is sold?
Yes, if the agreement allows it. Some supplier, license, and distribution agreements terminate on a change of control or give the supplier a right to cancel or require approval. Have counsel read the key agreements during diligence, approach the supplier early with a qualified case, and make approval a closing condition for agreements that carry real value.
Which agreements are most likely to have these clauses?
Distribution and dealer agreements, franchise and license agreements, exclusive supply agreements, and software licenses.
Is a stock deal safer than an asset deal here?
Not always. A change of control clause can apply in a stock deal, and an asset deal may require assignment. Ask counsel about your structure.
What if I cannot get approval before closing?
Consider a price adjustment, a holdback, or a transition arrangement. Discuss with counsel.