Acquiring valuable contracts when taking over a business can provide you with an immediate source of reliable and sustainable income following a takeover. Although there are a number of legal factors to take into account, contracts are, on the whole, freely assignable and will transfer to you as the buyer following a deal.
A company's contracts are often an important part of a business, adding substantial value. In some cases the contracts in themselves may represent the bulk of the enterprise value.
These could be contracts with customers, representing the business’s revenue source; contracts with service providers; licensing agreements allowing the business to operate; or a lease for a desirable location or on favourable terms.
As a buyer, contracts are much easier to take over and fulfil if you are buying a business in a field in which you already operate. Having the right industry know-how, equipment, staff and facilities in place at the point of takeover will enable you to continue to honour your target business’s existing contracts without delay - immediately benefiting from an established income stream in doing so.
There are a number of industries in which there are more likely to be contracts included in a business purchase. Catering, events, telecoms, IT, travel, marketing and commercial cleaning are just some of these. The value of a business from a buyer’s perspective will depend largely on the value, length and terms of its contracts in many instances and, as a buyer, it is essential to examine these factors thoroughly as part of the due diligence process before agreeing to a purchase. Each contract should be carefully reviewed with your legal adviser to determine how solid it is and to examine aspects such as termination, length, renewal and dispute procedures. The review should also take into account whether any consents or notices will be required before or after completion of the proposed transaction (see ‘assignments’ below).
Having a complete and accurate understanding of a company’s contracts will also enable you to better value the business and work out what the maximum bid price ought to be. It is likely that you will be analysing the contracts as part of a due diligence process after a Heads of Agreement has been signed, so a mutually acceptable deal is already on the table. However any defects in the contracts or discoveries at odds with the seller’s description should be jumped upon and used to your advantage in the final negotiation stage to bring down the price.
Buyer seeks contract
Sometimes, the right business buyer meets the right contract and great things can happen. Taking over a business’s contracts, particularly in a case where the target company is struggling to honour said contracts can be great news not just for you as the new owner, but for the customers. An example is the takeover of Peyton and Byrne’s public catering contracts business by Sodexo Sports & Leisure in October last year.
Peyton & Byrne holds a number of high profile public catering contracts at cultural venues across London, including the National Gallery, the Imperial War Museum, the Wallace Collection and the Royal Academy of Arts. However, they lost their contracts with the Royal Botanic Gardens Kew and the British Library, which prompted the division to enter a pre-pack administration. The five remaining public contracts are now being run by Sodexo with Peyton and Byrne’s founders Oliver and Siobhan Peyton continuing to manage contracts included under the deal.
Nathalie Bellon-Szabo, global chief operating officer at Sodexo Sports & Leisure, said: “We are delighted to join forces with Peyton and Byrne to grow our business in London, a highly strategic market for Sodexo Sports & Leisure, which is already present in several museums and cultural attractions across the UK.”
This is a perfect example of the stars aligning for a perfect deal. Sodexo, as the business buyer, saw its established venue contract catering business bolstered with some appealing and high profile contracts, while Peyton and Byrne were able to retain some personal involvement, which is likely to appeal to the customers and staff alike. In fact, all 440 employees at the public contracts business were retained under the takeover, facilitating perfect continuity of service.
Checking the legalities
Although contracts are usually automatically assignable to new owners after a takeover deal, there are exceptions and you need to be aware of these when looking to buy a business for its contracts. Ensuring the assignment of contracts should be of primary importance to your takeover deal.
Perhaps the most important to look out for are anti-assignment provisions. These are clauses in the contracts that allow the customer to end the contract in the event of a change in ownership. Some such provisions outrightly preclude the assignment of contracts in the event of a buyout. There are cases where the customer cannot reasonably withhold their consent for the assignment of the contract to the new owner, but this is not always the case.
Another situation in which contracts may not be automatically assigned is when a contract is personal in nature. If a contract involves the provision of personal skills or is based on a personal relationship, it may not be assignable to a new owner following a sale.
The same can be said in the case of an asset purchase. When a business is selling some or all of its assets, the buyer needs to establish whether there is an anti-assignment clause in place. In the case that there is an anti-assignment clause in place, consent would have to be sought in order for any assets in the form on contracts to be assigned to the purchaser.
Seeking the consent can sometimes be a time-consuming business, with a time-period written into the anti-assignment clause that gives any third party the right to mull over and research the change in ownership over a number of weeks. Factors such as extra costs and confidentiality issues should also be taken into account by buyers in this situation.
In conclusion then, buying a business for its contracts is generally straightforward and contracts will be automatically assigned to the new owner providing no anti-assignment clause is included in these contracts. If this is the case, the purchase becomes a potentially complex one carrying much greater risks.
In any event, a thorough review of every contract is necessary in the deal negotiation process to ensure a successful continuance of the business post-sale.
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