Key takeaways
- 35–55% of commercial service contracts in the lower middle market contain assignment restrictions, change-of-control provisions, or both. Most founders have never read for these specific clauses.
- Anti-assignment clauses and change-of-control provisions trigger differently: anti-assignment requires an asset sale structure to trigger; change-of-control triggers even in a stock sale. Deal structure choices are partly driven by which provisions apply.
- Government contracts require FAR 42.1204 novation, a formal three-party agreement with the agency that takes 6–12 months and has no guarantee of approval. For federal contractors, this is the highest-risk contract issue in a transaction.
- Buyers price material consent requirements as execution risk, not just as a process complication. Expect a lower LOI or an indemnity escrow equal to the revenue at risk when consent is required and not yet obtained.
- Conducting a contract audit before the process lets you time consent outreach strategically. Requesting consent after LOI is signed alerts counterparties a sale is occurring and transfers negotiating leverage to them.
In this article
- Assignment vs. change-of-control: the legal distinction
- What happens when consent is required
- When consent surfaces post-LOI: what to do in the next 72 hours
- How buyers price and structure around consent requirements
- Government contracts: the novation requirement
- How to conduct a contract audit before the process
How to use this before a process
Rule of thumb: if a buyer will ask for it in diligence, build it before the process. The same work costs less, creates more confidence, and carries more valuation benefit when it is completed before exclusivity.
35 to 55 percent of commercial service contracts in the lower middle market contain assignment restrictions, change-of-control provisions, or both (Deloitte 2025). The distinction between assignment and change of control is legally meaningful: assignment is triggered by a transfer of the contract itself, while change of control is triggered by a change in who owns the business, a different legal event that most standard anti-assignment clauses do not address.
41 percent of sellers in PE-backed M&A transactions discover at least one material assignment restriction or change-of-control provision during buyer diligence that was not identified before the process began (SRS Acquiom 2025). Discovering this after LOI is signed gives counterparties maximum leverage.
Government contracts require novation, a formal three-party agreement involving the buyer, seller, and federal agency, rather than simple consent. The novation process takes 6 to 12 months and has no guarantee of approval.
Readiness Snapshot
What buyers will ask
Which terms change economics after the headline price is agreed?; What conditions let the buyer delay, retrade, or walk away?; Which obligations survive close and how are they capped?
What to prepare
Marked LOI or purchase agreement term tracker.; Economic impact summary for escrows, holdbacks, notes, and indemnities.; Approval, covenant, and closing-condition checklist.
Most founders who have built strong customer relationships believe those relationships will transfer naturally when the business sells. In some cases that is true. In others, the contracts governing those relationships contain provisions that give the customer the right to exit, renegotiate, or withhold consent to a change in ownership. Understanding which of your contracts contain these provisions, before a process begins, is one of the highest-value steps a seller can take.
Assignment vs. change-of-control: the legal distinction
These are two different contract provisions that are often confused. An anti-assignment clause restricts the transfer of a contract from one party to another. In a stock sale, the business entity does not change, the same company continues to be a party to the contract, so a pure anti-assignment clause is not triggered. Only the ownership of that company changes.
A change-of-control provision is broader. It is triggered when there is a change in who controls the business, regardless of whether the contract itself is assigned. Change-of-control provisions are the more dangerous of the two in M&A because they apply even in a stock sale structure where the contracting entity remains the same.
The structure of the sale, asset sale vs. stock sale, determines which type of provision is triggered. An asset sale triggers anti-assignment clauses. A stock sale does not trigger anti-assignment clauses but does trigger change-of-control provisions. Buyers and sellers sometimes choose deal structure based in part on which provisions need to be avoided.
35-55%
Commercial contracts with assignment or CoC provisions
41%
Sellers who find issues during diligence
6-12 months
Federal contract novation timeline
0
Guarantee of novation approval
What happens when consent is required
When a contract requires counterparty consent to an assignment or change of control, the seller must obtain that consent before or at close. This is a key element of transaction readiness. Obtaining consent is not always a formality. The process of requesting consent alerts the counterparty that a sale is occurring, which can trigger renegotiation requests, termination notices, or other complications.
A $19M government services contractor had 40 percent of revenue from federal contracts requiring formal novation per FAR 42.1204.
The buyer conditioned close on novation approval for the two largest contracts. The novation process was initiated at LOI signing. It took 8 months.
During that period, the business continued operating but the buyer and seller both incurred costs they had not anticipated: the seller spent approximately $180,000 in additional legal fees and management time managing the process, attending agency meetings, and responding to agency inquiries. The deal closed on the original economics, but the seller's net proceeds were reduced by $180,000 due to costs not anticipated in the deal model.
Customers who discover a transaction is occurring sometimes use the consent process as leverage. They may request pricing reductions, contract extensions at current rates, or service level improvements as a condition of granting consent. This leverage is highest when the sale is discovered during the process rather than managed proactively. Sellers who identify consent requirements in advance can time their consent outreach strategically rather than reactively.
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Run an AI readiness scan →When consent surfaces post-LOI: what to do in the next 72 hours
Discovering a consent requirement after the LOI is signed is one of the most stressful situations a seller can face. The buyer knows the transaction details. The customer does not yet, and the moment you request consent, they will. The leverage dynamic shifts immediately: the customer now knows you are selling, knows your banker is engaged, and knows the deal timeline. They can use that information.
The 72-hour window after discovery matters because the sequence of disclosures is partly controllable. The wrong sequence is: buyer finds the provision in diligence, escalates to their counsel, buyer's counsel demands a closing condition, customer is notified under legal pressure, customer smells blood. The right sequence is: you find it first, assess its materiality, develop a consent outreach plan, and present the plan to the buyer before they raise it. Sellers who get ahead of their own consent problems negotiate from a stronger position than those who are reactive.
The worst outcome in late-stage consent discovery is not the customer saying no. It is the customer discovering the sale from a source other than you, a supplier asking about the transaction, a diligence consultant reaching out, a LinkedIn post. Customers who feel blindsided have less goodwill to extend and more motivation to use their consent right as leverage. Control the disclosure sequence.
If the consent is for a materially important contract, say one representing 10% or more of revenue, the buyer will likely make receipt of consent a closing condition. That means the deal cannot close until you have the consent letter in hand. As a seller, negotiate the closing condition carefully: either cap the revenue threshold that triggers a required consent, or negotiate a consent escrow, a portion of proceeds held in escrow until consents are received post-close, rather than an outright price cut.
How buyers price and structure around consent requirements
Experienced PE buyers have seen consent issues in dozens of transactions. Their response is not to walk, it is to price the risk and restructure. Understanding how buyers think about consent risk helps sellers anticipate what is coming in the purchase agreement and negotiate the right protections.
The indemnity escrow is the most common buyer tool. A defined dollar amount, typically equal to 12–24 months of revenue from the at-risk contract, is withheld from closing proceeds and held in escrow. If the consent is received within the cure period (often 90–180 days post-close), the escrow releases to the seller. If the consent is not received and the contract terminates, the buyer draws on the escrow to cover lost revenue. From the seller's perspective, this means delayed receipt of a portion of proceeds rather than an outright price cut, usually the better outcome.
The seller-favorable counteroffer: agree to a consent escrow rather than a price cut; negotiate a short cure period (60 days vs. 180); agree that the escrow releases automatically if the customer does not terminate within the cure period (silence is deemed acceptance); and cap the escrow at 12 months of contract value rather than 24. These four negotiating points can recover material proceeds in situations where buyers propose escrow of up to 2 years of contract revenue.
Government contracts: the novation requirement
Federal government contracts are subject to FAR 42.1204, which requires a formal novation agreement when ownership of a government contractor changes. Novation is not assignment, it is a three-party agreement in which the government formally recognizes the new entity as the successor in interest to the contract. The process requires submission of specific documentation to the relevant contracting office, and the timeline is determined by the agency, not by the buyer and seller.
Novation is not guaranteed. Agencies can decline to novate a contract, require modifications to contract terms as a condition of novation, or allow the contract to expire rather than novate. For businesses with significant federal contract revenue, the novation risk profile should be part of any pre-sale assessment.
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How to conduct a contract audit before the process
Pre-Sale Contract Assignability Audit
Step 1: Compile the full contract library
Collect all customer agreements, vendor contracts, leases, and licenses. Include expired contracts if they have been operating under a holdover arrangement.
Step 2: Flag assignment and change-of-control provisions
Review each contract for anti-assignment language, change-of-control definitions, and consent requirements. Note whether the provision is silent (default rules apply), notice-only, or consent-required.
Step 3: Segment by materiality
Prioritize contracts representing the top 80 percent of revenue. For each, identify whether the provision requires consent and who the counterparty contact is.
Step 4: Assess government contract exposure
Identify all federal, state, and local government contracts. Confirm whether they are prime contracts (full novation required) or subcontracts (different rules apply).
Step 5: Develop a pre-process consent strategy
For material contracts requiring consent, determine whether to obtain consent before the process, during the process under NDA, or at LOI signing. The timing choice affects counterparty leverage significantly.
Frequently asked questions
What should be in a customer consent letter?
A consent letter for a commercial contract change-of-control typically confirms: (1) the counterparty acknowledges the change of ownership, (2) the counterparty agrees the contract remains in full force and effect, (3) the counterparty waives any rights to terminate or renegotiate arising solely from the change-of-control event, and (4) the counterparty identifies the correct notice address for the successor entity. Legal counsel should draft or review all consent letters before they are sent.
Can we close the deal without obtaining all required consents?
Technically yes, but two consequences follow. First, you will have breached the representation in the purchase agreement that required consents have been obtained, which may trigger an indemnification claim. Second, some contracts automatically terminate upon an unconsented assignment, the buyer receives a business that has already lost the contract at close. Most buyers will not accept this risk for contracts representing more than 5% of revenue.
When should we approach customers for consent, before or after LOI?
Before LOI, under a mutual NDA, gives you control over timing and framing. You can present the change as a growth opportunity for the customer relationship rather than a distress event. Customers approached post-LOI know you are under time pressure, which shifts leverage to them. The tradeoff is that pre-LOI outreach requires disclosing a potential sale before deal certainty exists. For low-risk customers, waiting is fine. For high-risk or government customers, start before LOI.
What if a customer refuses to grant consent?
If a customer refuses consent to a change of control, the buyer can either walk away from the transaction, restructure the deal to avoid triggering the provision (for example, structuring as a stock sale if the provision is an anti-assignment clause only), or accept the risk that the contract terminates at close. Buyers will typically price this risk as a reduction in enterprise value or insist on an indemnity escrow equal to the contract revenue at risk.
Should I disclose contract assignability issues to buyers in the CIM?
Experienced buyers will find them in diligence regardless. Proactive disclosure in the CIM or management presentation, paired with a plan for obtaining consents, is generally better than having the buyer discover the issue independently. Discovery by the buyer creates a retrade opportunity. Proactive disclosure with a mitigation plan demonstrates process management capability.
Work with Glacier Lake Partners
Request the Contract Assignability Audit Checklist
Most useful for service businesses with 10 or more customer agreements, particularly those with government clients or regulated-industry customers.
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Disclaimer: Financial figures and case-study details in this article are anonymized, composite, or representative examples based on middle market operating situations, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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