Assuming customer agreements through an asset purchase

June 24, 2022

by a professional in Nashville, TN, USA

I'm working with a client that is acquiring an industrial services business through an asset deal. As a non-traditional buyer for this industry, they are worried about the transferability of customer agreements, specifically customers not executing a consent to assignment and/or renegotiating rates and terms, which could lead to margin erosion. Does anyone have any experience with this?

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Reply by a searcher
from Cornell University in Los Angeles, CA, USA

I did a similar transaction and changed to stock purchase midway. You'd have to read through the agreements and each will say what type of consent is required. Most won't let you transfer an agreement without consent and no one will consent prior to close. Also check to see if there are any licensing or registration requirements with the government. Asset purchase means you're starting from scratch. Might as well start your own company. Downside of stock purchase is you might inherit their skeletons. Must have a tight stock purchase agreement with reps and warranties covering everything. Make sure the sellers have assets. Indemnification is only good if they can cover a potential lawsuit.

Reply by a searcher
in Alpharetta, GA, USA

Warren I changed my deal structure from asset purchase to stock purchase after investing three months and $20,000 in legal fees specifically for this reason. It is a huge risk. If you go to a customer and tell them that you need them to sign a new contract with you instead of the previous business owner, their first question is going to be – who are you? And if you have no relevant experience in the industry then they would be remiss in not considering canceling the contract, right?

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