Due diligence discovery: non-assignable contracts

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August 23, 2023

by a searcher from Emory University in Atlanta, GA, USA

I am in the due diligence period attempting to acquire a established commercial cleaning business and found out that a number of the contracts are not assignable. They have to be manually agreed upon again after the sale. This was not known to me at the beginning when I made the offer and I consider this to come with a degree of risk as some might decide to not sign the contract.

Any thoughts or recommendations on the best way to address?

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Reply by a searcher
from Wake Forest University in Houston, TX, USA
I asked a similar question a couple weeks ago for the deal I’m currently doing due diligence on.

https://www.searchfunder.com/post/under-loi-navigating-contracts-and-licenses-in-an-asset-sale#

We had initially agreed to an asset sale which wasn’t going to work with the high volume of contracts that couldn’t be assigned without written consent. So we’re now finalizing a revised agreement as a stock sale and (I think) a 338(h)(10) election, which treats the sale as an asset sales for tax purposes.

definitely more complex in some ways, but simpler in others, in particular not having to worry about assignment.
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Reply by a searcher
in Alpharetta, GA, USA
Mauricio what is the reason you want to do an asset purchase instead of equity deal? My view is that the main reason not to do an equity purchase is to avoid legacy risks and liabilities. But what are the real risks and liabilities for a cleaning business? Having bought 2 of them in the last 5 years I can tell you those risks are de minimis. In any case they pale in comparison to the risk of losing customers because you have to get them to sign a new contract. If you want to buy this business, the path of least resistance is to do a stock deal. If you try to do some complex escrow or contractor/subcontractor arrangement the most likely outcome is that the seller walks away.
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