Top 20 Destroyers of Business Value # 15 – Assignability of Contracts

Posted on December 5, 2012 · Posted in Blog

One simple but often overlooked destroyer of value is the assignability of contracts.  This often creates surprises and rears its ugly head in the middle of due diligence.   Not having assignable contracts is often a major deal breaker and at the least a stumbling block.   We’ve seen many transactions slam on the brakes while the seller is forced to scramble to ensure the buyer or valuator that supplier or customer contracts can be assigned.

Value is based on assumed future business results and achieving those results may depend on the continuation of a contract.   If there is a risk that an agreement can be terminated with a change of control, then that risk will be taken into consideration when assessing value.  Most acquisition agreements require that existing contracts will remain valid after a change of ownership.

The lack of an assignability clause may restrict a company’s ability to assign or convey a contract and can make a contract null and void in the event of a sale, change of control or merger.  This includes: leases, loans, liens, licenses, alliances, supply/service agreements, real estate contracts, employee agreements and a myriad of others.

In most cases including an assignability clause in the initial contract is never an issue, but is often overlooked.   Business owners should add an assignability clause to all contracts when they are negotiated and written.

Are you destroying value by not having an assignable contracts and agreements?

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