Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The Anti-Assignment Trap That Cost a Seller 16 Million
Transcript
- Lucas: So there's this thing in contract law called the anti-assignment clause, and it sounds like boilerplate, something your lawyer skims past in a 40-page agreement. But in the right circumstances, it can quietly erase sixteen million dollars from your deal. Luna: Sixteen million. That's a specific number. What happened? Lucas: A mid-sized B2B software company, about sixty million in revenue, was being sold to a strategic buyer. The deal was structured as a stock sale, so in theory, the contracts stay in place — the company keeps its obligations, just with a new owner behind the scenes. But the target had one major client, a Fortune 500 manufacturer, that made up about thirty percent of its revenue. Luna: Thirty percent. That's the kind of concentration that gives buyers nightmares. Lucas: Exactly. And in that client's contract, there was a change of control clause. Essentially, if the software company were acquired, the client had the right to terminate the contract unless they gave written consent to the new ownership. The seller's legal team saw it, but they assumed it was a formality. The client had been with them for eight years, they had a great relationship, so nobody flagged it as a deal-breaker. Luna: But the buyer must have done due diligence. Why didn't they catch it? Lucas: They did catch it. The buyer's lawyers flagged it during diligence, and they told the seller: you need to get that consent in writing before we close. The seller went to the client, kind of confident, and the client's procurement team said, sure, we'll consent, but we want a ten percent discount on the enterprise license fee, plus an extended term with a cap on annual increases. Luna: So they used the change of control as leverage to renegotiate. Lucas: Exactly. And the seller had no leverage in that conversation, because the buyer had made clear that without that consent, the deal wouldn't close. So the seller conceded. The new contract terms, over the projected five-year period, were worth about sixteen million less than the original deal. That loss came straight out of the purchase price. Luna: So the seller didn't just lose revenue on that contract. They lost enterprise value. That's brutal. Lucas: And it's a classic case of a clause that's buried in the fine print, but it's the kind of thing that should be mapped out months before you even start talking to buyers. A simple spreadsheet of all your major contracts, flagging any change of control or consent to assignment provisions, could have saved them. Luna: But is it really that common? I feel like most founders don't even know those clauses exist in their own contracts. Lucas: It's very common in B2B, especially with larger clients. And the thing is, the seller could have gone to the client earlier, before the deal was public or even before the buyer was involved, and asked for the consent as a matter of course. But they didn't, because they didn't see it as a risk. Luna: So what's the lesson for an operator who's thinking about selling at some point in the next few years? Lucas: Start your due diligence on yourself now. Create a contract matrix. Identify every agreement with a change of control or consent to assignment clause. And then, if you have a client that's critical, consider opening a conversation early about your plans, carefully, of course, to get a sense of whether they'd consent or if they'd try to use it as leverage. Luna: You know, this reminds me of a conversation I had with a founder who sold her logistics company last year. She told me that her biggest regret wasn't the valuation but a single contract with a major shipping partner that had a similar clause. She said if she could go back, she'd have gotten that consent in writing two years before the sale. Lucas: That's the kind of foresight that separates the deals that feel smooth from the ones that get nickled and dimed. And honestly, if that story or today's episode has moved your work forward in some small way, the kind of thing you'd mention to a colleague, that's the link — buy me a coffee dot com slash fexingo. It's the smallest ask, and it keeps this show ad-free. Luna: Yeah, it's a nice way to keep the conversations going. Lucas: So back to that contract matrix. The other thing that's interesting is that the buyer's lawyer, in this case, probably did their job well. They found the clause, they flagged it, they gave the seller a chance to fix it. But the seller's own team had been looking at that contract for years and never saw it as a problem. Luna: So it's not just about the clause itself. It's about how you assess your own risk before you're in the middle of a hot deal. Lucas: Right. And that's the thing that I think a lot of operators miss. They think that the only risk is what the buyer finds during diligence. But the reality is, you should be doing your own diligence on yourself at least a year before you plan to sell. And that includes reading your own contracts with fresh eyes, or better yet, having an outside attorney review them, someone who's not steeped in the history of the relationship and can see the traps. Luna: So what's the actual legal mechanism here? How does an anti-assignment clause work in a stock sale? Lucas: So in a stock sale, the corporate entity remains the same. So technically, the contract is not assigned — it's just that the ownership of the company changes. But many contracts, especially with sophisticated parties, include a change of control provision that treats an acquisition as if it were an assignment. That means the other party has the right to withhold consent, and they can condition that consent on whatever they want. Luna: So it's essentially a contractual veto. And in this case, the client had all the power. Lucas: All the power. And they used it. The seller was in a bind, because they had a deal with a buyer who was ready to close, and the client knew that. So the client could extract concessions that they might not have gotten otherwise. And the seller had to eat it. Luna: Is there any way to mitigate that? I mean, can you structure the deal differently to avoid triggering the clause? Lucas: Sometimes. You could do an asset sale instead, which would require the client to consent to a new contract with a new entity. That's often more disruptive, but sometimes it's cleaner. Or you could structure the acquisition as a merger, but that might still trigger a change of control provision. The key is to know what you're dealing with before you choose the deal structure. Luna: So the choice of structure should be informed by your contract landscape. Lucas: Exactly. And in this case, the seller's advisors didn't even think about it. They went with a stock sale because it was simpler for the shareholders, and they got burned. If they'd done an asset sale, they might have had to renegotiate the contract anyway, but at least they could have approached it from a position of strength, before the buyer was in the picture. Luna: What about the buyer? They must have known about the clause from the start. Could they have done something to help the seller? Or were they just being practical? Lucas: The buyer was practical. They had no incentive to help the seller get a better contract, because that contract was going to be theirs after the acquisition. If the client wanted to renegotiate, the buyer might even have seen that as a benefit, because they'd get a better price on a critical contract without having to do the hard work of negotiating it themselves. Luna: So the seller was really on their own. Lucas: Completely. And that's the harsh reality of M&A. The buyer is not your advisor. Their interests are aligned with theirs, not yours. So you have to look out for yourself, and that means understanding your contracts better than anyone else. Luna: What about the idea of asking for a waiver from the client before you even sign a letter of intent? Is that realistic? Lucas: It's smart. You can't ask for a waiver before you have a buyer, because you don't know who the buyer is. But as soon as you have a potential buyer in mind, even before you sign anything, you could approach the client and ask if they'd be open to consenting to a change of control. You don't have to tell them the buyer's name, but you can gauge their reaction. Luna: But wouldn't that tip your hand? The client might start to worry about the stability of the company or the relationship. Lucas: It's a risk. You might spook them. But the alternative, as we've seen, is getting trapped in a renegotiation at the worst possible moment. So it's a judgment call. If the client relationship is solid, it's probably worth the conversation. If it's shaky, maybe you wait. But the point is to have a strategy for every critical contract, not to discover these things in the middle of a deal. Luna: So what's the takeaway for someone who's not planning to sell for another five years? Is this something they should worry about now? Lucas: I'd say start building that contract matrix now. Even if you're not selling, understanding your own risk is valuable. And when you do start a sale process, you'll have a head start. The worst thing you can do is be reactive in a process that's already intense. Luna: And what about the buyer? Are there any lessons for them in this story? Lucas: For the buyer, the lesson is to be proactive about these clauses. In this case, the buyer found it during diligence, but they could have asked the seller to start the consent process earlier. Sometimes buyers are so focused on the financials that they forget about the operational risks. The buyer here was lucky that the client didn't use the change of control to walk away entirely. Luna: That's a good point. The client could have said, we don't want to work with the new owners, and terminated the contract. That would have killed the deal or forced a massive revaluation. Lucas: Right. And that's a whole other level of risk. So if you're a buyer, you should have your own checklist of critical contracts to review, and you should push the seller to get consents in writing as early as possible. But at the end of the day, the seller is the one who pays the price. Luna: So the big lesson here is: know your contracts, and don't assume the fine print is fine. Lucas: That's the takeaway. The sixteen million in this story was a direct result of a clause that had been sitting in a contract for years, ignored by everyone. And it's a reminder that in M&A, the smallest details can have the biggest impact. So if you're an operator, go back and read your contracts. Look for the words 'change of control' or 'consent to assignment.' And if you find them, start thinking about how you'll handle that when the time comes. It could save you a lot of money. Luna: I think that's a really practical note to end on. Lucas: Yeah. Thanks for listening, and we'll catch you on the next one.