Don’t Let Your Service Contracts Kill Your M&A Deal

By Candace Groth

When a deal is on the table, the focus naturally gravitates toward valuation, cap tables, and keeping key personnel. Service provider contracts? They often end up on the back burner — until they become a problem. For startups being acquired and funds navigating portfolio company transactions, understanding how your service agreements affect an M&A transaction can mean the difference between a smooth close and a last-minute scramble.

Here’s what you need to know — before and during the transaction.

Why Service Contracts Matter in M&A

Most service agreements are drafted with a single relationship in mind. They are rarely written to anticipate a change of control, an asset sale, or a merger – but they should be. A SaaS platform your company depends on daily, an accounting firm with years of institutional knowledge, or a critical IT infrastructure provider could all be disrupted — or lost entirely — if their contracts aren’t handled properly.

The consequences can range from operational headaches to deal-breaking complications, including unexpected termination rights, repricing, or consent requirements that slow down closing.

Preparing for Your Transaction

The best time to address service contract risk is long before a transaction is on the horizon. Here are some key areas to consider:

Contracts Management Matters

That Word copy of a service agreement that isn’t signed, or the one with only the customer’s signature? It’s not a problem – until your potential buyer asks for a fully signed copy of the agreement. Incomplete records and the structure (or lack thereof) of small business contract management systems can turn a 30-day deal into a 90-day slog. Well prepared businesses maintain a living inventory of fully signed, material service agreements and audit them regularly. For each one, they know the term, renewal dates, termination provisions, annual/monthly dollar value, parties, and signature status. They also make sure that all SOWs (Statements of Work), order forms, invoices, and other minor agreements are also stored in their contracts management system. And most importantly, these businesses know what they would do if someone asked them to pull every single customer and vendor contract organized by customer or vendor name. Could you do that without hundreds of hours of labor? If not, your contracts management system could be a barrier to your next M&A deal.

Understand your change of control provisions

These clauses can give a service provider (including you) the right to terminate, reprice, or require consent upon a change of ownership. SaaS vendors and professional service firms frequently include them. Know which of your agreements have them and what they trigger. And make sure that your standard customer agreements allow you to assign the agreement if you sell.

Watch your SaaS agreements closely

Enterprise software licenses often include seat-based or entity-based restrictions that don’t automatically extend to an acquirer. Indeed, most agreements prohibit assignment altogether. If your tech stack is core to your business model, a buyer will scrutinize this closely during diligence.

What to Watch for During the Transaction

Once a deal is underway, service contract issues tend to surface fast. Keep an eye on the following:

Assignment and consent requirements

Many agreements prohibit assignment without the counterparty’s prior written consent. In an asset deal, this clause is almost always triggered. In a stock deal or merger, it depends on how the clause is drafted — ‘change of control,” “transfer,” and “assignment” are not always the same thing, and the distinction matters.

Automatic termination clauses

Some agreements — particularly with professional service providers — terminate automatically upon a change of control or insolvency event. These can be easy to miss and hard to fix after the fact.

Repricing and renegotiation leverage

A change of control can give a vendor the contractual right — or leverage — to renegotiate pricing or key terms. Budget for this possibility, especially with sole-source or hard-to-replace vendors.

Competitor Acquisition

Some service providers lock their technology away from competitors in a golden chest, and prohibit customers from disclosing any information to the vendor’s competitors on pain of death (or contract breach). If you are being acquired by a buyer that could be a major competitor of one of your primary vendors, knowing what is in your agreement(s) and developing a plan with the potential buyer may mean the difference between a nasty contract dispute and a successful transaction.

Notification obligations

Even where consent isn’t required, many agreements require notice of a change of control within a specific timeframe. Missing these deadlines can constitute a breach.

Data and access rights

For SaaS and IT providers, confirm that data ownership, export rights, and access terms survive the transaction and transfer to the new entity as intended.

The Takeaway

Service contract continuity is a due diligence issue, an operational issue, and increasingly a valuation issue. Buyers discount deals with unresolved vendor or customer risk, and sellers lose leverage when these issues surface late. Whether you are preparing a company for sale, investing in a new platform, or navigating a portfolio company transaction, getting ahead of your service agreements is one of the highest-return preparations you can make.

About the Author(s)

Candace Groth

Candace Groth is a senior attorney at Vela Wood. She focuses on mergers & acquisitions and complex LLC matters.

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