When purchasing another business, one of the most important aspects of due diligence is reviewing the selling business’ contracts. Often the selling business’ revenue stream is tied to some type of contract. For example, it may get income through services contracts, sales contracts, licensing contracts, or even insurance billing contracts. Accordingly, those types of contracts might actually represent most of the value of the seller’s business. The buyer is going to want to make sure that those valuable contracts are assignable to a new entity (the buyer) and remain in effect after the sale. Inability to assign crucial contracts to the buyer may affect the purchase price or even doom the entire transaction.
Second, a review of contracts shows how a selling business conducts its operations. Who are their vendors and suppliers? What consultants and professionals do they rely on? What substantial assets and services does the seller need to conduct its business? The answers to these questions are generally found in a business’ contracts. Review of such contracts can give the buyer a clearer picture of not only what is necessary to operate the selling business but also how well a particular business operates.
Finally, a selling business’ contracts are often the largest liabilities of the selling business. The contracts to which the selling business is a party will show its obligations. Some of these liabilities might arise through contracts entered into in the ordinary course of business, such as leases or loans, and some liabilities might arise through contracts outside of the ordinary course of business, such as non-competition agreements or settlement agreements.
A proper review of the selling business’ contracts is necessary to ensure that the buyer is getting what it actually bargained for and that the purchase price reflects the true value of the selling business. For more information on buying and selling businesses, contract law or other business matters, please contact PLDO Attorney Joshua J. Butera at 401-824-5100 or email jbutera@pldolaw.com.
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