Why do buyers aggressively audit our vendor contracts, customer agreements, and intellectual property assignments during due diligence, and what contract cleanup must we do years prior to going to market?

Question

Tyler Smith · Accepted Answer

During due diligence, buyer attorneys dissect your legal agreements with surgical precision. Many owners assume that having good relationships with vendors, clients, and software developers is sufficient. It is not. If your legal foundation is untidy, buyers will leverage contractual ambiguity to demand massive escrow holdbacks or renegotiate the purchase price.

The most common deal killers in contract diligence involve assignability, intellectual property ownership, and informal customer commitments.

Begin your contract cleanup at least two years before exploring a transaction:

- Change of control clauses: Review every major client and vendor contract. If an agreement states that the contract terminates automatically upon a change of control or requires prior written consent from the counterparty, you have given third parties the power to hold your closing hostage. Systematically amend these to standard assignability language during annual renewals.
- Intellectual property assignment: Every line of code, proprietary workflow, brand asset, and product design must be legally owned by the business entity, not by you personally or an external independent contractor. Ensure you have fully executed proprietary information and inventions agreements (PIIA) signed by every current and former employee and contractor who touched proprietary company assets.
- Written master service agreements: Eliminate handshake agreements and loose purchase orders for major accounts. Transition all revenue to binding master service agreements with clear terms, recurring deliverables, and enforceable payment schedules.

Cleaning up your corporate records removes friction, accelerates closing timelines, and signals to the buyer that your company is an institutional-grade operation.