When selling your MSP, one often overlooked yet critical aspect is contract assignability. Contract assignability refers to transferring existing customer contracts from your MSP to the acquiring company. Ensuring smooth contract transfers is essential for maintaining business continuity post-acquisition, yet it’s also a common stumbling block in MSP deals. Here’s what you need to know about contract assignability and why it matters.
What You Need to Do Before Selling
- Ensure Contracts Are Fully Executed: Before considering a sale, review all contracts and agreements to confirm they are fully executed and up to date. Any unsigned or outdated agreements can create obstacles during due diligence, slowing down the deal or even causing potential buyers to reconsider.
- Have Accessible Copies: Make sure both digital and paper copies of all contracts are organized and accessible. Buyers will want easy access to these documents to review terms, assess transferability, and understand any renewal or termination provisions.
- Confirm Assignability Clauses: To avoid complications, contracts should be assignable at a minimum on a “Change of Control” or “Asset Sale” basis. This language allows contracts to transfer seamlessly to the buyer without needing client or vendor consent in most cases. Sellers should work with legal counsel to ensure these clauses are present and enforceable.
- Clarify Contract Terms and Cure Periods: Contracts with clear lengths, defined cure periods for addressing breaches, and minimal “easy outs” for clients provide stability during the transition. This is particularly important for recurring revenue contracts that form the backbone of MSP valuations.
- Implement Auto-Renewals with Price Increases: Contracts with auto-renewal provisions and structured price increases add predictability and enhance revenue forecasts. Buyers are often willing to pay more for businesses with recurring revenue contracts that include future price escalations.
Why Contract Assignability Matters
- Avoiding Deal Delays: If contracts cannot be transferred smoothly, sellers and buyers may have to negotiate separately with each client to create new agreements. This process is time-consuming, can delay closing, and may even risk losing key clients during the negotiation period.
- Minimizing Client and Supplier Risks: Some contracts allow the other party to renegotiate or even terminate the agreement when it’s assigned to a new owner. This can be a significant risk in MSP transactions if key clients or suppliers use the opportunity to push for better terms or decide to leave altogether. Sellers should work proactively to minimize these risks by securing assignability in advance.
- Ensuring a Smooth Due Diligence Process: During due diligence, buyers will carefully review the assignability of all key contracts. Contracts that require third-party approval or have complicated transfer restrictions may raise red flags. Buyers prefer straightforward, transferable agreements, as these reduce risks and expedite the transition.
- Maintaining Business Continuity Post-Acquisition: Successfully transferring contracts is essential for maintaining continuity in the MSP’s operations after the acquisition. Ensuring that contracts transfer smoothly minimizes disruptions in service, which could otherwise harm client relationships and impact revenue stability.
