Protecting Your Business’s Value: Why Change of Control Provisions Matter for Founders

For many founders, securing a strong customer base is central to their company’s long-term value. But what happens when the business is sold, and a key contract allows customers to walk away? This is where Change of Control provisions come into play. Too often overlooked during negotiations, these clauses can have serious ramifications for both your company’s valuation and your future business prospects. Here’s why founders should carefully consider these provisions.

What is a Change of Control Provision?

A Change of Control provision is a clause typically found in contracts that allows one party—often a customer or supplier—to terminate the agreement if there is a change in the other party’s ownership or in the control of the business. This could happen in the event of a sale, merger, acquisition, or even a significant internal restructuring that shifts control of the company.

While this may sound like a safeguard for the party with the change-of-control right, it can cause serious problems for the seller—especially if the business is relying on contracts with recurring revenue to secure its valuation.

Why is it Important?

In many cases, the valuation of a business will hinge on the consistency and predictability of recurring revenue. However, if a customer contract includes a broad Change of Control provision, this gives rise to the risk that customers could walk away after the sale of the business closes. If potential investors or acquirers discover that key contracts are exposed to Change of Control provisions during their due diligence, the buyer may lower their offer or even choose not to proceed with the transaction.

This is why it’s critical for founders to understand that a bad Change of Control clause can erode the value of their business, potentially leading to a lower sale price or complicating negotiations.

Solutions: How to Protect Your Future

There are ways to mitigate the risks posed by Change of Control provisions, ensuring that they don’t unnecessarily jeopardise your company’s valuation or make your business harder to sell.

1. Negotiate Shorter Termination Windows
   Consider negotiating a shorter period during which the customer can exercise the termination right following a change of control.
2. Limit the Scope of “Change of Control”
   You can also negotiate the definition of a “change of control” to ensure it doesn’t apply to every internal restructure or corporate event. For example, internal reorganisations, group restructurings, or international expansions (if applicable) should not trigger a termination. This provides greater flexibility for the business, particularly if you are looking to grow internationally or raise capital without triggering adverse contractual consequences.
3. Define Exemptions for Certain Types of Acquisitions
   Not all acquisitions should be treated equally. If your business is acquired by a competitor, it’s understandable that a customer might want to protect their proprietary information or avoid a conflict of interest. However, if the acquirer is not a direct competitor or is in a complementary industry, it may make sense to exclude these types of deals from the change of control provision.

The key takeaway is to avoid treating contracts as a simple checkbox. Take the time to negotiate these clauses carefully, ensuring that they do not negatively impact the long-term value of your business. The time and effort spent today on securing more flexible Change of Control provisions could significantly improve your valuation when it comes time to sell.

For legal assistance with your commercial contracts, if you are seeking investment, or if you want to discuss Change of Control provisions in more detail, please contact Rhiana Mandair or John Harrington.