In the world of business acquisitions, one critical issue that is often overlooked during the early stages of deal structuring is third-party consents. Whether you are considering an asset purchase or a stock purchase, understanding how third-party approvals impact your transaction can mean the difference between a smooth closing and a delayed - or even failed - deal.
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Understanding the Basics of Third-Party Consents
Third-party consent refers to the approval or authorization required from external parties - often contractual counterparties - before certain changes in control or ownership can occur. This issue becomes especially important in mergers and acquisitions (M&A) where the buyer is stepping into the seller's contractual or regulatory obligations.
Where Third-Party Consents Arise:
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Leases (real property and equipment)
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Customer or vendor contracts
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Loan agreements
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Franchise agreements
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Government licenses or permits
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IP licenses or technology agreements
Each of these may contain anti-assignment or change-of-control clauses that trigger the need for consent.
Asset Sale Transactions: When Are Third-Party Consents Required?
In an asset sale, the buyer is purchasing specific assets and liabilities - not the legal entity itself. This makes third-party consent more common and more critical in these types of deals.
Why Asset Sales Require More Consents:
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Contracts do not automatically transfer.
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Any contractual obligation or benefit must be formally assigned.
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If a contract has an anti-assignment clause, consent from the counterparty is typically required.
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Even silent contracts (with no assignment clause) may require notice or cooperation from the counterparty to assign.
Common Problem Areas:
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Key customer contracts that prohibit assignment
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Licenses or permits that are non-transferable
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Real estate leases that require landlord approval
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Software licenses that restrict transferability
Failing to obtain necessary consents can lead to:
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Breach of contract claims
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Loss of critical business relationships
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Deal delays or renegotiation
Pro Tip: Buyers should begin contract due diligence early to identify which agreements require consents and how difficult they will be to obtain.
Stock Sale Transactions: Fewer Consents, But Hidden Risks
In a stock sale, the legal entity remains intact - only the ownership of the company changes. Because the entity remains the same, contracts do not typically need to be assigned, which often reduces the number of required third-party consents.
However, this doesn't eliminate the issue altogether.
Triggers in Stock Sales:
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Change of control clauses may still require notice or consent
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Franchise agreements often restrict transfer of control
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Government licenses or regulated industries may have mandatory approvals for ownership changes
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Shareholder agreements or investor rights may be affected
What to Watch For:
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Buried provisions in boilerplate language that trigger on indirect ownership changes
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"Deemed assignments" which treat ownership changes as an assignment
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Credit facilities with "change of control" triggers that could accelerate loans
Even in a straightforward stock sale, a detailed review of the target's contractual obligations is essential.
Strategic Considerations When Structuring the Deal
When choosing between an asset sale and a stock sale, parties should not only consider tax implications and liability exposure - but also the practical impact of third-party consent obligations.
Questions to Ask During Planning:
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Which contracts are critical to the business?
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Do those contracts contain assignment or change-of-control clauses?
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How likely is it that third parties will consent?
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What are the timelines and risks associated with seeking those consents?
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Are there regulatory or licensing implications?
In some cases, the need for extensive consents in an asset sale may tip the scales toward a stock transaction, especially where time is critical or contract relationships are sensitive.
Tip for Buyers and Sellers: Make third-party consent planning a key part of the initial letter of intent (LOI) phase and deal diligence checklist.
Negotiating Consent Obligations in the Purchase Agreement
Once the buyer and seller understand which consents are needed, the next step is to address responsibility and timing in the purchase agreement. This is a crucial aspect of deal negotiation.
Allocation of Risk and Responsibility
The parties must decide:
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Who is responsible for obtaining the consents - buyer, seller, or both
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Whether obtaining certain consents is a condition to closing
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What happens if a key consent cannot be obtained
Typical solutions include:
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Closing conditions tied to specific material consents
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Covenants requiring the seller to use "commercially reasonable efforts" or "best efforts" to secure consents
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Indemnities if failure to obtain a consent results in loss or liability
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Holdbacks or escrow provisions tied to post-closing risk
A knowledgeable business attorney can help structure these clauses to balance business risk while keeping the deal on track.
Workarounds When Consents Cannot Be Obtained
Not all third parties will be cooperative. Sometimes, consent is refused, delayed, or conditioned on payment or contract renegotiation. In those cases, experienced counsel may help the parties navigate around the issue.
Creative Approaches Include:
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Back-to-back arrangements: The seller continues to hold the contract and passes benefits to the buyer through a side agreement.
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License or sublicense structures: Especially for software or IP assets that cannot be assigned directly.
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Management or transition agreements: Where the seller continues managing the relationship for a limited period post-closing.
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Escrow of consideration: A portion of the purchase price may be withheld until consents are received.
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Delayed transfer structures: Splitting closing into phases, where assets tied to pending consents are transferred later.
While these alternatives carry additional complexity, they may allow the transaction to proceed even when consents are stalled.
Regulatory and Industry-Specific Consent Challenges
Certain industries - especially those involving regulated products or professional services - face heightened consent and approval requirements that can't be easily negotiated around.
Common Examples:
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Healthcare and financial services: Licensure often attaches to individuals or entities, requiring approval before transfer.
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Government contractors: May require novation of contracts from the contracting agency.
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Franchise systems: Franchisors typically require detailed approval processes and documentation before ownership changes.
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Alcohol and cannabis businesses: Heavily regulated, often requiring pre-approval from multiple agencies.
In these scenarios, buyers should plan for longer deal timelines, government filings, and more robust due diligence.
Due Diligence and Planning Best Practices
1. Begin Consent Review Early
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Don't wait until the definitive agreement is signed to begin identifying contracts that require consent.
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Include a consent analysis in the early stages of due diligence.
2. Inventory All Contracts
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Create a comprehensive list of contracts tied to the assets or entity.
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Flag any agreements with anti-assignment, change-of-control, or "no transfer without approval" provisions.
3. Communicate Strategically With Third Parties
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Involve legal counsel before initiating consent discussions.
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Craft a message that protects confidentiality while preparing counterparties for the transition.
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Offer incentives if necessary to secure cooperation.
4. Coordinate Consents With Regulatory Filings
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Align contractual consents with any government applications or waiting periods (e.g., under antitrust or licensing laws).
When Third-Party Consents Drive the Deal Structure
In some deals, the consent landscape becomes so complex that it drives the ultimate decision on how to structure the transaction.
Example Scenarios:
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A target company with dozens of critical non-assignable customer contracts may lean toward a stock sale to avoid triggering mass consents.
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An acquirer who wants only certain assets (and not liabilities) may insist on an asset sale, even if it requires extensive outreach for consents.
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In a merger or hybrid structure, parties may blend elements of both to achieve the best result.
This is where experienced legal guidance makes a real difference. An attorney can help you evaluate the risks, craft tailored deal provisions, and plan a practical path forward.
Contact an Attorney for Business Transactions Involving Third-Party Consents
Whether you're selling your company or acquiring another business, third-party consents can significantly influence how the transaction is structured and closed. At Heritage Law Office, we help clients navigate these complexities with clarity and confidence.
Our experienced attorneys assist with:
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Business purchase and sale negotiations
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Due diligence and contract review
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Structuring asset and stock deals
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Managing third-party consent obligations
Contact us today to schedule a consultation by calling 414-253-8500 or reaching out through our online form.
Frequently Asked Questions (FAQs)
1. What is a third-party consent in a business acquisition?
A third-party consent is permission granted by an external party - such as a landlord, customer, vendor, or government agency - allowing the transfer or continuation of a contract or right when a business is being sold or acquired. These consents are often triggered by provisions in contracts that prohibit assignment or require approval upon a change in ownership.
2. Why are third-party consents more common in asset sales than stock sales?
In asset sales, individual contracts and assets are transferred to the buyer, which typically triggers anti-assignment clauses. These clauses require consent from the original contracting party. In contrast, stock sales involve a change in ownership but not the legal entity itself, so contracts often remain in place - unless they include specific change-of-control provisions.
3. What happens if a required third-party consent isn't obtained before closing?
Failure to obtain a necessary third-party consent can delay or derail the transaction. In some cases, the buyer may be unable to use a critical contract or asset, potentially harming business operations. Deals often include provisions to delay the closing, allocate risk, or create workaround structures if consents are not received in time.
4. How can I tell if a contract needs third-party consent before a sale?
You or your attorney must review each contract for assignment or change-of-control clauses. Look for language that restricts transferring the agreement, requires the counterparty's prior written approval, or treats a change in ownership as a de facto assignment. Due diligence is essential for identifying these clauses early.
5. Are there ways to proceed with a transaction if a third party refuses consent?
Yes. If a third-party refuses consent, the buyer and seller may consider workaround strategies such as transition service agreements, sublicensing, or deferred closings. These alternatives require careful legal planning and should be tailored to the specifics of the deal and the contract in question.