Key takeaways
- Change of control clauses in customer contracts can block a transaction or require consent at close.
- Review every major customer contract for assignability provisions before engaging a banker.
- Contract consent processes add weeks to diligence and give customers unintended leverage.
- Buyers discount businesses with material consent requirements because of execution risk.
- Address non-assignable contracts proactively and document the customer relationship beyond the paper.
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 2024). 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.
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.
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 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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