Many of our key customer accounts are on handshake agreements because we have trusted them for decades. Why will an institutional buyer penalize us for this, and how do we transition these to formal contracts without risking the relationships?

Question

Tyler Smith · Accepted Answer

Handshake agreements represent a major point of failure during due diligence. While you view these informal arrangements as proof of strong relationships, an institutional buyer views them as customer concentration risks that could evaporate the moment you walk out the door. If a buyer cannot legally guarantee that your revenue stream will continue post-transaction, they will either slash your valuation multiple or walk away from the deal entirely.

To secure your enterprise value, you must formalize these relationships during your exit runway. Frame this transition to your clients not as a lack of trust, but as a professional step to ensure long-term continuity and better service.

Begin by introducing formal service level agreements that outline terms, pricing structures, and transferability clauses. Ensure these contracts explicitly state that the agreement remains valid in the event of a change in control. If a client is resistant, use your leadership team to manage the conversation, proving to the buyer that the customer relationship is tied to the organization, not to you personally.

Review your progress during your weekly Level 10 Meeting™ and track contract conversion as a major Rock. By converting handshake deals into transferable legal assets, you derisk the investment for potential buyers and justify a top-quartile valuation.