Purchasing a business can be one of the most significant financial and legal commitments you'll ever make. While due diligence encompasses many components-financials, operations, compliance, and liabilities-contractual obligations are often the most overlooked area. Yet, they can contain hidden risks or unexpected obligations that dramatically impact valuation, operations, and profitability.
This article serves as a practical checklist of the most critical contracts to review before acquiring a business. A thorough contract review, conducted with the help of an experienced business attorney, can help ensure a smooth and informed transition. Contact us by either using the online form or calling us directly at 414-253-8500 for legal assistance.
Why Contract Review Matters in a Business Purchase
Contracts are the legal backbone of any business. They outline relationships, allocate risks, define payment terms, and determine how disputes are resolved. When you buy a business, you're typically inheriting these legal relationships-including their liabilities. Failing to review or renegotiate them can expose you to:
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Ongoing financial obligations or debts
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Hidden termination clauses
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Non-compete or exclusivity restrictions
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Legal disputes with vendors, landlords, or clients
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Compliance failures with local or federal regulations
Before you sign a purchase agreement, ensure a thorough contract review is part of your business acquisition due diligence checklist.
Asset Purchase vs. Stock Purchase: Why It Affects Contracts
Whether you're purchasing assets or equity can significantly influence how contracts are handled:
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Asset Purchase: Only contracts that are explicitly assigned to the buyer are transferred. This gives buyers more control but may require third-party consents.
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Stock Purchase: All existing contracts remain with the business entity, meaning the buyer inherits both favorable and unfavorable terms.
Either structure demands a full audit of existing agreements. An experienced attorney can help you evaluate risk and determine which contracts should be included or excluded.
Contract Categories to Review Before Buying a Business
Each category of contract carries specific risks and legal implications. Below is a comprehensive checklist of contracts you should request and review with legal counsel before proceeding with a purchase.
1. Commercial Leases and Real Estate Agreements
These agreements often contain assignment restrictions, personal guarantees, and clauses that trigger termination or rent increases upon change of ownership. Review for:
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Assignment and sublease provisions
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Renewal and rent escalation clauses
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Maintenance and repair obligations
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Termination penalties
If the lease is not assignable or contains a change-of-control clause, you may need the landlord's written consent.
2. Employment Agreements and Independent Contractor Contracts
Labor-related contracts can create major risks for buyers, especially if they include:
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Non-compete or non-solicitation clauses
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Deferred compensation or bonus structures
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Severance or golden parachute provisions
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Misclassification of independent contractors
Ensure that key personnel are willing to stay on post-sale and consider negotiating new terms.
3. Customer and Client Contracts
Buyers often assume that business will continue as usual, but that depends heavily on the strength and terms of existing customer agreements. Review for:
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Duration and renewal terms
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Termination for convenience or cause
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Pricing and discount arrangements
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Exclusive or restrictive clauses
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Assignment clauses requiring customer approval
Some clients may have the power to terminate the relationship upon transfer, which could dramatically affect revenue forecasts.
4. Supplier and Vendor Agreements
These contracts govern your cost structure and supply chain reliability. Review the following:
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Minimum purchase commitments
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Termination clauses and penalties
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Exclusivity or single-source arrangements
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Delivery and payment terms
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Automatic renewal clauses
Ensure the business won't be tied to uncompetitive pricing or inflexible terms after the acquisition.
5. Licensing and Intellectual Property Agreements
Is the business dependent on intellectual property it does not own? Review:
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Trademark, copyright, or patent licensing agreements
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Software-as-a-service (SaaS) or platform subscriptions
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Confidentiality or trade secret agreements
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Restrictions on use or sublicensing
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Assignment or change-of-control restrictions
If these agreements are not assignable, the business's ability to operate post-sale may be impaired.
6. Franchise Agreements (if applicable)
Buying a franchised business comes with its own unique legal framework. Franchise disclosure documents and franchise agreements must be reviewed in detail:
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Term and renewal rights
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Territory limitations
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Transfer approval process
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Ongoing royalty and marketing fees
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Training and operations obligations
Refer to our article on Franchise Disclosure Document Item 11 for deeper insights.
7. Loan Agreements and Lines of Credit
Debt obligations and liens can drastically affect the value of the business. Review:
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Acceleration clauses upon sale
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Personal guarantees by the seller
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Collateral agreements or UCC filings
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Interest rate adjustments
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Prepayment penalties
Clarify whether the buyer is assuming any of the seller's debt, or if it will be paid off at closing.
8. Non-Compete and Restrictive Covenant Agreements
These may impact both your ability to operate and the seller's behavior post-sale. Evaluate:
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Whether the seller has a valid and enforceable non-compete
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Duration and geographic scope of any restrictions
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Non-solicitation or non-interference clauses
Without these, the seller could potentially compete against the business they just sold.
9. Litigation Settlement Agreements and Ongoing Legal Disputes
Purchasing a business without a clear picture of its legal history can lead to unwanted surprises. Settlement agreements and ongoing litigation can contain obligations that survive closing. Watch for:
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Confidentiality or non-disparagement clauses
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Future payment obligations or structured settlements
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Indemnity clauses that might bind a new owner
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Pending claims or unresolved disputes
Ensure your due diligence includes a full review of the litigation history, including court records, settlement documents, and any potential contingent liabilities.
10. Insurance Contracts and Policies
Insurance may not transfer automatically and could leave you exposed post-acquisition. Key areas to assess:
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Business liability, errors and omissions (E&O), workers' comp, and umbrella policies
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Policy terms, coverage limits, exclusions, and expiration dates
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Tail coverage or retroactive coverage for prior claims
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Contractual obligations that require specific insurance types
Discuss with an attorney whether existing policies can or should be assumed, or whether you need to secure new coverage immediately upon closing.
11. Government Contracts and Regulatory Agreements
If the business works with federal, state, or local governments-or is heavily regulated-contract compliance is critical. Review:
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Licensing and permit agreements
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Government contracts subject to approval upon transfer
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Compliance with local, state, or federal regulations
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Environmental obligations or consent decrees
Regulatory restrictions can delay closings or prevent contract assignments altogether without agency approval.
12. Partnership Agreements, Joint Ventures, and Shareholder Agreements
If the target business has partners, investors, or is part of a joint venture, these agreements may significantly restrict your control. Look for:
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Buy-sell provisions or rights of first refusal
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Drag-along or tag-along rights
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Distribution and profit-sharing arrangements
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Voting rights and governance procedures
Understanding these terms helps ensure you're not stepping into an unfavorable control or ownership situation.
13. Technology and SaaS Contracts
Today, nearly every business relies on software, cloud services, and third-party tech infrastructure. Key terms to review:
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User limits and seat licenses
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Termination clauses or early exit fees
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Data ownership and export rights
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Uptime guarantees and SLAs (service-level agreements)
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Data protection and privacy compliance (e.g., GDPR, CCPA)
Failure to confirm access to essential platforms can delay operations and create data vulnerabilities.
14. Affiliate, Marketing, or Influencer Agreements
In digitally driven businesses, online marketing relationships can drive major revenue. Review:
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Revenue-sharing or affiliate commissions
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Ownership of brand content or domain names
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Influencer deliverables and exclusivity terms
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Contract duration and cancellation rights
Losing a key promotional partner due to contract restrictions could weaken your customer acquisition strategy.
15. Confidentiality and Non-Disclosure Agreements (NDAs)
These agreements often protect valuable trade secrets, business plans, and customer lists. While they may not be top-of-mind during an acquisition, they must be:
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Reviewed for ongoing enforceability post-transfer
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Updated to reflect the buyer as the new disclosing party
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Considered when determining whether to disclose sensitive information to the seller pre-closing
Failing to secure proper NDAs can lead to reputational and financial damage, especially during the transition period.
Red Flags That May Require Renegotiation or Termination
While not every contract needs to be assumed, it's critical to identify which contracts are worth renegotiating, terminating, or excluding from the sale. Red flags include:
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Automatic renewal without buyer approval
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Termination penalties upon transfer
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Excessively restrictive covenants
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Unfavorable pricing or long terms
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Hidden indemnity or warranty clauses
A knowledgeable attorney can help you identify which agreements are liabilities, and whether they can be renegotiated or excluded in an asset purchase.
Requesting and Reviewing Contracts: Best Practices
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Ask Early: Request copies of all material contracts during the due diligence phase-not after signing the Letter of Intent.
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Create a Tracking Sheet: Use a centralized spreadsheet to track contract types, key terms, expiration dates, renewal terms, and assignability.
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Involve Legal Counsel: Contract language can be complex and nuanced. Legal review is essential to identify risk and advise on strategy.
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Prioritize Material Contracts: Not all contracts carry equal risk. Focus first on those tied to revenue, obligations, or critical infrastructure.
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Use Representations and Warranties: In your purchase agreement, include seller representations about the validity and completeness of contracts.
Contact a Business Contract Attorney for Purchase Due Diligence
A successful business acquisition starts with understanding what you're really buying-including its legal obligations. At Heritage Law Office, our experienced attorneys help clients conduct thorough due diligence, negotiate favorable terms, and avoid post-sale pitfalls by proactively reviewing all critical contracts.
Whether you're purchasing a small family-owned company or a multimillion-dollar enterprise, we'll help ensure your investment is sound and sustainable.
Contact us today through our online form or call us directly at 414-253-8500 to speak with an attorney about buying a business and reviewing contracts.
Frequently Asked Questions (FAQs)
1. What contracts are typically transferred automatically when buying a business?
In a stock purchase, contracts generally remain with the business and transfer automatically since the entity itself doesn't change. In an asset purchase, contracts do not transfer automatically and must be assigned with proper consent from the other party. This is why reviewing assignment clauses is essential during due diligence.
2. Why is it important to review customer contracts before buying a business?
Customer contracts directly affect recurring revenue, client retention, and future obligations. Reviewing them ensures you're aware of renewal terms, termination rights, exclusivity provisions, and whether clients can walk away upon a change in ownership. These insights help validate the reliability of the revenue stream you're acquiring.
3. How can I tell if a contract includes a non-assignability clause?
Look for specific language in the contract under headings like "Assignment," "Transfer," or "Change of Control." These sections often state whether the contract can be assigned to a new owner and if consent from the other party is required. An attorney can help interpret and flag problematic language.
4. What are the risks of assuming vendor contracts without review?
Vendor contracts can contain minimum purchase requirements, automatic renewals, or pricing structures that may not align with your future business goals. Without reviewing these contracts, you risk overpaying, violating terms, or becoming locked into long-term obligations that limit your operational flexibility.
5. Is a contract review necessary for small business purchases?
Absolutely. Whether you're purchasing a small business or a large enterprise, every contract carries legal and financial implications. Even one unfavorable agreement can lead to disputes or profit loss. A contract review helps protect your interests and avoid hidden liabilities-no matter the size of the transaction.