Contracts that may not transfer when you buy a business

When you buy a business, part of what you're paying for is its agreements. Think of customers who have signed up for regular service, a supplier's pricing, a franchise or a dealer's territory, and the software that runs scheduling and billing. It's easy to assume all of that comes along automatically. Much of it may not. Some agreements need the other side's permission to move to a new owner, and some let the other side walk away when ownership changes.

Finding that out after closing can cost you a large piece of what you paid for. Here's what to look for, and when.

Why contracts don't always come along

It depends partly on how the purchase is set up, which you'll decide with your attorney and accountant.

• Buying the assets. In many small business purchases, the buyer's company buys the assets of the seller's company, including its contracts. Each contract has to be assigned, meaning formally handed over from the seller to you. Many contracts say they can't be assigned without the other party's written consent.
• Buying the company itself. If you buy the shares or ownership interests instead, the contracts stay with the same company, so nothing is assigned. But many contracts include a change of control clause, which treats a change in ownership as if it were an assignment. That can mean the same need for consent, or a right for the other side to end the contract.

Either way, someone has to read the contracts.

The clauses to look for

• Assignment. Can the contract be assigned? Only with consent? Does it say consent can't be unreasonably withheld?
• Change of control. Does a change in ownership count as an assignment, or give the other side the right to end the contract?
• Termination for convenience. Can the customer end the contract at any time with notice, for any reason? If so, even a contract that transfers is only as secure as the relationship behind it.
• Term and renewal. When does it end? Does it renew automatically, or does someone have to act?
• Exclusivity and territory. Does the business have exclusive rights to a product or an area? Do those rights depend on who owns it?
• Pricing. Is a favorable price locked in, or is it tied to the current owner's relationship?
• Personal guarantees. Has the owner personally guaranteed the contract? The other side may want you to replace that guarantee with your own.

Customer contracts

Maintenance agreements, service contracts, and cleaning, monitoring or management contracts are often the heart of a company's value.

Say you're looking at a hypothetical commercial cleaning company whose three largest customers are office buildings run by property managers. If each contract says it can't be assigned without consent, those three customers each decide whether they come with your purchase. And if the contracts can be ended on 30 days' notice, the relationship matters more than the paper.

Government contracts have their own rules. Under federal procurement rules, a federal contract can't simply be transferred to someone else. The government may recognize the buyer of a contractor's assets as its successor through what's called a novation agreement, but that's at the government's discretion. State and local contracts have their own requirements, so ask your attorney.

Supplier, distributor and dealer agreements

Some businesses depend on the right to sell or install a particular brand, sometimes with an exclusive area. Manufacturers often keep the right to approve a new owner, and that approval can depend on your experience, your finances or their own plans for the area. Ask a plain question: if this agreement doesn't transfer, what's left of the business?

Favorable supplier terms deserve a look too. Credit terms and discounts may have been earned by the current owner over many years. A new owner may start over.

Franchise agreements

If the business is a franchise, expect the franchisor to have a say. Under the federal Franchise Rule, a franchisor's disclosure document includes a section, Item 17, that summarizes the franchise agreement's rules on renewal, termination and transfer. Its table covers whether the franchisor must approve a transfer and the conditions for approval. It also shows whether the franchisor has a right of first refusal: a right to step in and buy the business itself, usually by matching your offer.

Ask the seller for the franchise agreement and the franchisor's current disclosure document, read the transfer section with your attorney, and plan to contact the franchisor early, with the seller's agreement.

Software, data and online accounts

• Software licenses are often licensed to a specific company or user and may not transfer. Subscriptions may need a new account in your name.
• Data. Who owns the customer records in the scheduling or billing system, and can they be exported if the software changes?
• Phone numbers, the website domain, email and social media accounts, and online review profiles. Confirm they belong to the business rather than to the owner personally, and that the purchase includes them. Customers call the number on the truck.

Equipment leases and financing

Leased vehicles, equipment and office machines usually need the leasing company's consent to transfer, or they have to be paid off at closing. Equipment loans often work the same way. List them early and ask your lender how they'll be handled.

The lease

For many companies, the most important contract of all is the lease on its building. It has its own set of questions, covered in the commercial lease.

Contracts at a glance

Contract	Common issue	Who has to agree
Customer service contracts	Consent to assign, short notice to cancel	The customer
Government contracts	Can't simply be transferred	The government agency
Dealer or distributor agreements	Approval of the new owner, exclusive area	The manufacturer or distributor
Franchise agreement	Transfer approval, conditions, right of first refusal	The franchisor
Software licenses	Not transferable, new account needed	The software company
Equipment leases and loans	Consent or payoff at closing	The leasing company or lender

Getting consents

When. Usually after you and the owner have agreed on the main terms in writing, and always with the owner's permission. Never contact customers, suppliers or a franchisor about the sale on your own. The seller often makes the first call, and sometimes you go together.

In what order. Ask the seller early in your review for a list of every written agreement, with roughly how much revenue or savings each one involves. Sort them into three groups: those that transfer freely, those that need consent, and those the other side can end. Start with the ones the business can least afford to lose.

In the purchase agreement. Your attorney can make the most important consents a condition of closing, so you don't have to close without them. If a key consent can't be confirmed in time, the deal terms can protect you, for example with a lower price, or an agreement that the seller pays you back part of the price if the customer leaves. (Making part of the price depend on the customer staying, an earnout, isn't allowed with an SBA 7(a) loan.) Price versus terms explains how that kind of structure works.

What to do this week

• If you're in talks with an owner, ask for a list of all written agreements: customers, suppliers, franchise or dealer agreements, software, equipment leases and the building lease.
• For each, find the assignment, change of control and termination clauses, and mark them.
• Rank the agreements by how much of the company's revenue or profit depends on them.
• Ask your attorney which consents should be conditions of closing, and how the purchase structure affects them.