Change of control clauses before a sale

When a business is sold, the company usually stays the same legal entity, so its contracts carry on. But many customer, supplier, lease, finance and licence agreements contain a clause that is triggered when ownership changes. It might require the other party's consent, give them a right to terminate, or let them revisit the terms. These are usually called change of control clauses, and they are easy to forget until a buyer's lawyers find them.

In this article we explain where these clauses tend to sit, why buyers care about them, and how to handle them well before they become a problem late in a sale.

Where they tend to appear

Change of control wording can turn up almost anywhere, but some agreements are more likely to include it than others:

• Contracts with larger customers, framework agreements and public sector contracts.
• Supplier, distribution and agency agreements, especially exclusive ones.
• Property leases, particularly where the landlord has rights over assignment or the identity of the tenant.
• Bank facilities, asset finance and invoice finance arrangements.
• Software, intellectual property and franchise licences.

In an asset sale the picture is different again, because contracts usually need to be transferred to the buyer, which often means asking the other party anyway.

Why buyers care

A buyer is paying for the business as it runs today, and that includes its customer relationships, its premises and its supply chain. If a key customer could walk away on completion, or a lender could call in a facility, the buyer is taking a risk they did not price for. They may ask for consents before completion, hold back part of the price, ask for specific protections in the sale agreement, or in the end reduce what they are willing to pay.

Find them early

The simplest step is to pull together your significant contracts and read them, or ask your solicitor to, well before you go to market. For each one, note whether a change of ownership needs consent, gives a right to terminate, or has no effect at all. A short schedule of this kind is useful in its own right, and it will save time when the buyer's diligence questions arrive.

Approaching the other party

Where consent is needed, timing matters. Asking a customer or landlord too early can put confidentiality at risk and unsettle a relationship before there is a deal to talk about. Asking too late can leave completion waiting on a third party. In practice, most sellers agree the approach with the buyer once terms are settled and the deal is reasonably certain, decide together who will make contact, and keep the message short and reassuring: the business, the team and the service are continuing.

Questions to ask yourself

• Which contracts would we struggle to replace if the other party walked away?
• Do any of them need consent, or allow termination, on a change of ownership?
• Is the business relying on any arrangement that is informal or out of date?
• Who would be the right person to speak to each key customer, supplier or landlord, and when?

How we approach this

We would rather know about these clauses early and plan for them together than discover them in the final weeks. As a direct buyer, we aim to agree a sensible approach to consents with the owner, respect the relationships they have built, and keep conversations with customers and suppliers confidential until the right moment. If you are thinking about a sale and want to talk through how your contracts might affect it, a short, confidential call is a sensible first step, with no obligation either way.