Organising contract assignments when selling a business: three stages to success

Kirsty Davey, Partner and Head of Corporate and Commercial at Coodes Solicitors, gives her advice on dealing with assignments when selling a business.

An assignment is a legal term that describes when you transfer a contract from one business to another. This is usually done when a business is sold and the new owner continues with existing arrangements with suppliers, contractors and other third parties. Reviewing contracts and assignments is a key part of the due diligence process and it can be time consuming and complex. So, what can businesses do to make it smoother and easier?

1. Pay attention to assignment clauses in your contracts

Many people ignore the boilerplate clauses in business contracts, but this is where permissible assignments are generally set out. A contract should specify whether the agreement between the two businesses is assignable or not. In other words, will the contract automatically transfer to a new owner if the business is sold? It is important therefore to make sure you understand and are happy with whatever is in the contract with regards assignments before you sign it. That will help avoid any nasty surprises further down the line.

2. Review your contracts for assignment clauses as soon as possible if you are selling your business

When you are selling a business there is a lot to sort out. Looking into assignments may not be top of your list of priorities, but I would strongly urge you to do so at the earliest stage. The first thing is to check which contracts are assignable and which are non-assignable. The potential buyer will be keen to know the status of your contracts before entering negotiations because if a contract is non-assignable there may be a risk they could lose it. If this relates to a high value contract this could prevent you from closing the deal.

3. Consider a novation for a non-assignable contract

After reviewing all of your contracts, you will need to pay attention to any that are non-assignable especially if you feel they might be of particular interest to the buyer. If you have a non-assignable contract and want it to transfer to the new owner, a novation is often the best option. A novation is a contract signed by all three parties replacing the original company (seller) with the new company (buyer).

For more information or advice on these issues, please contact Kirsty Davey at Coodes Solicitors on 0800 328 3282 or email kirsty.davey@coodes.co.uk

For advice on disputes, please contact Abi Lutey on 01872 246200 or abi.lutey@coodes.co.uk