Legal diligence reviews the company's most important customer, supplier and partner contracts for clauses that transfer risk or restrict future options: change of control, exclusivity, most-favoured pricing, uncapped liability and easy termination.
11 min read · Level 3
I find a one-page contract register more useful than a stack of reviewed contracts, because the risks only become visible side by side. A single change-of-control clause is a detail; three of them across the largest customers is a statement about what the company would be worth to a buyer.
Material contracts are those whose loss or terms could significantly affect the business: largest customers, critical suppliers, key partners, licences and leases.
Clauses to look for:
Clause What it does Why it matters Change of control lets the other party terminate if the company is sold can reduce value at exit Exclusivity prevents working with competitors or in certain markets restricts growth Most-favoured nation guarantees a customer the best price offered anyone limits future pricing Uncapped liability no limit on damages the company could owe a single claim could be existential Termination for convenience either party can end without cause revenue less secure than it looks Assignment restrictions contract cannot be transferred without consent complicates restructuring or sale Auto-renewal and notice renews unless cancelled by a deadline affects predictability of revenue
A simple register helps: for each material contract, list value, term, renewal date and any of the clauses above.
Because the value of a company's revenue depends on its contract terms. A large contract that can be terminated on 30 days' notice is less secure than a smaller one locked in for three years.
Some clauses only matter at exit - when an acquirer discovers that the three largest customers can leave on a change of control.
This is educational information, not legal advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: U.S. SEC - Investor.gov; UK GOV.UK - Business and self-employed; U.S. Small Business Administration
A contract register for the top five customers.
Customer Annual value Term left Change of control Termination Liability cap A 700,000 8 months yes 90 days none B 300,000 26 months no for cause 12 months fees C 200,000 14 months no 30 days 12 months fees D 150,000 30 months yes for cause 12 months fees E 120,000 5 months no for cause 12 months fees
850,000 of the top five's 1,470,000 (A + D) can terminate on a change of control, and the largest contract has uncapped liability. Those two findings become negotiation and risk items, not footnotes.
Reviewing contracts only for price and length, while missing clauses that restrict pricing, growth or a future sale.
Choose contracts by value and importance to operations.
Record value, term, renewal and key clauses for each.
Highlight change of control, exclusivity, MFN, uncapped liability and easy termination.
Ask whether terms can be renegotiated, insured against or priced in.
During diligence on any company whose value depends on a small number of important contracts.
Do not try to interpret complex contract terms without a qualified lawyer where significant value depends on them.
Acquisition lawyers and deal advisers routinely identify change-of-control provisions in customer, supplier and licence contracts as a key diligence item, as consents may need to be obtained before closing and counterparties can use them to renegotiate terms.
Change-of-control clauses give counterparties leverage at exactly the moment a sale is being negotiated.
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