Informal vendor relationships and handshake customer contracts create severe valuation haircuts during due diligence. How do we systematically audit and paper our commercial agreements years before going to market?

Question

Tyler Smith · Accepted Answer

Buyers purchase contractual cash flow, not informal goodwill. If your commercial relationships rest on oral understandings, expired agreements, or handshake deals, an acquirer will discount your purchase price or structure an aggressive earnout to offset the legal and operational risk.

Begin a comprehensive contract audit two to three years before you plan to launch an exit. Pull every active customer, vendor, and employment agreement into a centralized repository. Classify them by annual financial value and expiration date.

First, examine customer contracts for assignability and change-of-control clauses. Many legacy agreements contain provisions that require customer consent if the company changes ownership. If an enterprise client can walk away upon a sale, that revenue is considered risky. Over your runway, systematically transition clients onto standardized Master Services Agreements that contain clear assignment language, recurring term renewals, and defined termination notice periods.

Second, audit vendor agreements to ensure you have secured long-term pricing, clear service-level commitments, and non-exclusive terms. Vendor concentration or informal supply agreements introduce supply chain risk that buyers will exploit to reduce their opening offers.

Third, paper your internal employment relationships. Ensure every key employee, contractor, and developer has signed a comprehensive intellectual property assignment, confidentiality agreement, and appropriate non-solicitation agreement. If an engineer owns code or a salesperson owns client lists, your deal room will stall.

Cleaning up legal and operational contracts years in advance eliminates red flags during confirmatory diligence, protects your negotiated price, and ensures a clean closing.