The existing contracts in the case of a business takeover can entail pitfalls. This is because the important relationships of a company ? for example with customers, suppliers, employees, landlords, licensors ? are laid down in contracts. These contractual relationships usually make up a significant part of the company’s value.
If not only a break-up value is to be realised in a business takeover, it is therefore advisable in preparation for a business sale to take a closer look at the existing contracts in the business sale and optimise them if necessary. Furthermore, it is advisable to carry out a systematic contract management and to organise an orderly contract filing.
Basics webinar presented by Nils Koerber
Company sale (M&A) without risk and loss of value
Observe clauses on change of ownership when selling shares
In the case of a share deal, only the ownership of these shares changes; all contracts concluded by the company itself with third parties basically remain unchanged. The following aspects, among others, are important:
- Are all contractual provisions, including contract amendments and supplements, documented and retrievable?
- Are all contracts in line with current legislation and case law? If necessary, lawyers should be consulted. This is because a buyer could otherwise find fault with this during a close examination of the company (?due diligence?) and possibly question their effectiveness.
- Are the purchasing, customer or other contracts standardised? Often there are historically grown, different contract contents for comparable circumstances. (Extensive) standardisation makes it possible to increase the company’s efficiency even before the sale.
- For example, do contracts contain termination rights of the contracting party in the event of a change of ownership, so-called “change of control” clauses? In this case the acquisition might be less attractive for the buyer because he cannot rely on the continuity of the contracts concerned. It may then be helpful to obtain prior consent to a transfer of the contracts when selling the business.
Existing contracts do not have to be automatically transferred to new owners in the event of a business takeover
If the buyer acquires defined assets such as machines, stocks, etc. by way of singular succession, the contracts concluded by the company are not automatically transferred when the company is sold. (asset deal), the contracts concluded by the company are not automatically transferred when the company is sold. In such cases, the transfer of contracts must be specifically regulated; in most cases, the consent of the contractual partner is also required for this. In the run-up to the sale of a company, it can be helpful to include this consent to a contract transfer in contracts as standard or to obtain it individually in advance in order to gain time in the sale process.
Transfer of business: Observe contracts of third parties or employees
A special provision applies for the protection of employees under section 613a BGB if a business or part of a business is transferred to another owner by legal transaction. In this case, the acquirer assumes the rights and obligations arising from the employment relationships existing at the time of the transfer and thus also the employment contracts, unless the employees concerned object.
Vendor due diligence to accelerate the sales process
In certain situations, such as when conducting a bidding process, it is advisable for the entrepreneur to compile all the essential facts, including the essential contracts, in advance in a data room where the prospective buyers can conduct the subsequent due diligence. Such a vendor due diligence goes far beyond the preparation of a company exposé. Through this, the sales process can be professionally initiated and, if necessary, accelerated. A level playing field in terms of access to information is created for all approved prospective buyers when purchasing a company.
Conclusion
Good contract management pays off in view of a pending company sale. It can facilitate a smooth sales process and increase the price that can be achieved in the sale of the business. At the same time, the seller signals a high degree of professionalism. Sellers are therefore well advised to deal with the contractual issues in good time before a sale. This is because the buyer will try to detect dangers and include appropriate provisions in the company purchase agreement.
Tips for further reading:
Selling a construction company: Is it worth it in the construction boom?
Free checklist for the regulation of business succession
The financing of business successions
Enterprise value-oriented company valuation pays off when selling a company
