How to Review Contracts After an Acquisition

When you acquire a business, you also inherit its contracts - everything from customer agreements to vendor deals, employment terms, and leases. These contracts come with obligations that can impact your revenue, costs, and operations if not handled correctly. Some contracts may have clauses triggered by the acquisition, like requiring consent, imposing penalties, or even terminating agreements. Ignoring these could lead to financial losses or disruptions.

To avoid these risks, focus on:

• Prioritizing contracts: Start with those affecting revenue, suppliers, employees, and leases.
• Identifying key clauses: Look for change-of-control terms, renewal dates, termination rules, and pricing adjustments.
• Organizing documents: Use a secure, centralized system for easy access and updates.
• Managing risks: Address unfavorable terms, compliance gaps, or missing documents quickly.
• Renegotiating and consolidating: Update terms where needed and eliminate duplicate agreements.

Act fast - many contracts have strict deadlines for notifications or renegotiations. A structured review process ensures a smoother integration and reduces potential headaches.

Contract Review Essentials: What Every Business Should Know

Which Contracts to Review First

After completing your due diligence, it's time to dive into the contracts that could have the biggest impact on operations. Start with those that could disrupt business immediately and create a system to prioritize the rest. This approach ensures a smooth transition while keeping key details from slipping through the cracks.

Focus on High-Impact Contracts First

Begin with the agreements that directly affect daily operations and revenue flow.

• Customer contracts: These are the backbone of revenue and often include change-of-control clauses that could lead to termination. Start with major customer agreements, then move on to others. Pay close attention to contracts with automatic renewal provisions coming up soon.
• Supplier and vendor agreements: Contracts for utilities, internet services, software licenses, and key suppliers are critical. Many of these include strict notice or termination terms that could disrupt operations if not managed properly.
• Employment and benefit agreements: Review agreements for key personnel, especially those with retention bonuses or provisions triggered by an acquisition. Some may include accelerated vesting of stock options or severance clauses, making them a priority.
• Real estate leases and property agreements: These agreements often come with high costs, intricate termination processes, and may require personal guarantees or landlord approval for ownership changes.
• Intellectual property licenses: Check for restrictions on transferring software, trademarks, or patents, as well as any notification requirements.

Use Your Due Diligence Results

Your due diligence findings are a goldmine for identifying which contracts need immediate attention. Look for red flags like unusual terms, missing documents, or other concerns flagged during the review process.

• Incomplete contracts: Agreements missing signatures, amendments, or renewal documents pose legal risks. Address these gaps early.
• Pricing anomalies or one-sided terms: These could be opportunities for renegotiation or, if necessary, termination.
• Contracts with upcoming deadlines: Agreements nearing renewal or termination dates, or those flagged for regulatory concerns, should be handled promptly to avoid legal or operational hiccups.
• Counterparty concerns: If a counterparty expressed issues during due diligence, managing these relationships proactively can help prevent disputes down the line.

How to Organize and Store Contract Documents

Having a clear system for organizing and storing contracts can save time and help avoid costly mistakes. It ensures that your team can quickly locate any contract during reviews and easily identify any missing documents.

Create a Central Contract Storage System

Set up a secure, centralized digital repository for all contracts. This eliminates the hassle of dealing with scattered documents across different systems, email accounts, or physical locations - an issue that can complicate reviews after an acquisition.

Use a consistent folder structure and naming convention to keep things organized. For example, you could organize folders by contract type, counterparty, or key dates. A naming format like CustomerContract_Company_Expiration can make finding specific documents much easier. Common categories might include customer agreements, supplier contracts, employment documents, real estate leases, and intellectual property licenses.

Security is a top priority when handling sensitive documents. Opt for a cloud-based storage system with features like encryption, access controls, and audit trails to monitor activity and ensure only authorized users can access the files.

For more advanced needs, contract management software can be a game-changer. These tools can automate tasks like categorizing contracts, tagging key terms, and flagging critical dates. While they require an upfront investment, they can significantly reduce the time and effort required to manage large volumes of contracts.

Find Missing Contract Documents

Even with thorough due diligence, some documents may be missing. Missing signatures, incomplete amendments, or absent agreements can pose legal risks that need to be addressed quickly.

Start by sending targeted information requests to the previous owners, focusing on specific contract types or topics. Avoid broad, one-size-fits-all inquiries, and be ready to follow up with more specific requests as you identify gaps.

Work directly with the previous owners to locate missing documents. These might still be stored in the company’s physical office or a virtual data room. Maintaining open communication with former management can be crucial in retrieving these records.

Interview key employees who may have institutional knowledge of undocumented agreements. Long-term staff often know about vendor relationships, service contracts, or informal handshake deals that may still affect business operations.

Visiting the acquired company’s facilities can also provide valuable insights. These visits might reveal equipment leases, maintenance agreements, or service contracts that weren’t obvious during the initial document review.

If access to certain records is restricted, consider negotiating confidentiality agreements to gain the necessary access.

Finally, use a detailed due diligence checklist to ensure all contract categories are accounted for. If you notice inconsistencies or red flags in the documentation, don’t hesitate to request further clarification. This ensures that all amendments, side agreements, and verbal modifications are properly documented.

A well-organized contract repository not only simplifies reviews but also ensures that your team can manage terms and obligations more effectively.

How to Review Contract Terms and Obligations

Once your contracts are organized, it's time to dive into a detailed review. This step builds on the earlier prioritization of high-impact contracts and involves carefully examining each clause to uncover potential risks, opportunities, or areas requiring immediate attention after your acquisition.

Key Contract Clauses to Review

Pay close attention to clauses that directly influence your operations and costs. These include:

• Assignment and transfer rights: These determine whether contracts can be transferred to your new entity. Some contracts may require written consent for assignment, which could complicate your integration plans. Watch for phrases like "this agreement may not be assigned without the prior written consent of both parties."
• Termination clauses: Understand the conditions, timing, and penalties for ending contracts. Contracts allowing immediate termination upon ownership change can disrupt critical operations.
• Automatic renewal terms: These clauses can extend unfavorable agreements unless notice is given, often 30 to 90 days before the term ends.
• Exclusivity agreements: These may limit your ability to work with other vendors, customers, or partners, potentially restricting future growth.
• Penalty and liquidated damages provisions: These outline financial consequences for breaches or early terminations, helping you gauge the cost of potential modifications.
• Pricing escalation clauses: Supplier contracts may include automatic price increases tied to inflation or commodity prices, which could strain your budget.

Don’t overlook clauses that allow the other party to terminate or alter terms due to ownership changes. These provisions can significantly impact your business relationships and should be flagged for immediate review.

Change-of-Control Requirements

Change-of-control clauses are critical in acquisition scenarios, and they typically fall into three categories:

• Automatic termination: The contract ends immediately when ownership changes. These clauses are particularly risky, especially in customer contracts, as losing major clients could severely affect revenue.
• Consent required: The other party must approve the ownership change. While this introduces uncertainty, it also opens the door for renegotiation and addressing concerns about the new ownership.
• Notification only: These are the least restrictive, requiring you to inform the other party about the ownership change without needing their approval.

Focus first on customer contracts and key supplier agreements, followed by employment agreements for essential personnel, and then other operational contracts like leases and service agreements. Document specific requirements for each contract, such as deadlines, necessary documentation, and approval processes. Some contracts may require formal legal notices, while others accept simpler methods like email.

Using Contract Comparison Charts

Once you’ve identified key clause issues, comparing similar contracts can highlight inconsistencies and areas for improvement. Contract comparison charts are a practical tool for spotting patterns and standardizing terms across agreements.

For example:

• Customer contracts: Track details like contract value, payment terms, renewal dates, termination clauses, and change-of-control requirements. This makes it easier to identify favorable terms or relationships that may need renegotiation.
• Supplier contracts: Focus on pricing, delivery terms, quality standards, and penalty clauses. You might find opportunities to consolidate suppliers or renegotiate pricing if similar services are provided at different rates.
• Employment contracts: Look for inconsistencies in compensation, benefits, or termination terms. Pay close attention to non-compete clauses, confidentiality agreements, and retention bonuses that could affect your integration plans.

Using spreadsheets to track key dates and clause details ensures you don’t miss critical deadlines or obligations during the hectic post-acquisition period.

Prioritizing High-Risk Contracts

Identify contracts that demand immediate attention, such as those with unfavorable terms, upcoming renewal dates, or significant financial exposure. Tackling these first allows you to allocate resources effectively and address the contracts that have the greatest impact on your business.

The comparison process often reveals opportunities to streamline and standardize terms across similar contracts. This can simplify ongoing contract management and reduce administrative burdens, making future operations more efficient.

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How to Reduce Risks and Stay Compliant

Once you've completed a thorough contract review, the next step is addressing potential risks to ensure compliance and a smooth integration process after the acquisition.

Identify Problem Contracts

Start by categorizing contracts that could pose risks. These typically fall into three main categories: financially unfavorable terms, compliance issues, and operational conflicts.

Compliance issues are a major concern. Look for contracts that clash with your company's policies, industry regulations, or legal standards. For example, if your organization adheres to strict data privacy rules but the acquired company’s vendor contracts fail to meet those standards, you'll need to resolve these gaps quickly to avoid regulatory trouble.

Operational conflicts can also disrupt your plans. These might include exclusive supplier agreements that block you from working with preferred vendors, non-compete clauses that limit your ability to expand into new markets, or employment agreements with retention bonuses that exceed your budget.

Pay close attention to contracts with upcoming critical dates. For instance, a customer contract set to auto-renew in 30 days with unfavorable terms demands immediate action. In contrast, a similar contract renewing in 18 months can be tackled during regular renegotiation cycles.

To manage these risks effectively, create a risk matrix to prioritize your actions. High-priority contracts often involve substantial financial exposure, critical business relationships, or immediate compliance concerns. Once you've identified problem contracts, focus on securing necessary approvals and meeting notification requirements.

Handle Required Approvals and Notifications

Develop a timeline that outlines all required notifications, deadlines, and relevant details. Some contracts may require formal legal notices sent via certified mail, while others might accept an email. Missing these deadlines could lead to penalties or even contract termination.

When notifying customers and suppliers, highlight your commitment to maintaining strong relationships. This is also an opportunity to explore improved terms or expanded partnerships. For customer notifications, include details about how the ownership change will benefit them, such as enhanced services or better resources.

For contracts that need third-party consent, prepare detailed information packages. These should demonstrate your company’s stability and commitment, including financial statements, insurance documentation, and references from other business partners.

Employment contract notifications require a delicate approach. Be transparent about the changes while reassuring employees about job security and potential growth opportunities under the new ownership. This helps maintain morale and retain key team members.

Use a centralized system to track all notifications and responses. This ensures no deadlines or important details slip through the cracks during the hectic post-acquisition period.

Build Risk Management into Your Integration Plan

Incorporate these risk mitigation steps directly into your broader integration strategy. Contract risks should be managed alongside operational, financial, and legal integration efforts - not treated as separate issues.

Financial planning should include the costs tied to contract-related risks, such as penalties, increased insurance requirements, or higher supplier costs. Operational plans must account for any constraints or opportunities tied to contracts. Similarly, legal and compliance integration should involve ongoing monitoring beyond the initial review.

Make sure your team is prepared for contract-related changes. Staff training and communication should cover updates to vendor relationships, customer terms, or service agreements that impact daily operations.

Establish escalation procedures to handle contract issues that arise during the integration. Assign specific team members to manage different types of problems and set up clear communication channels for quick resolution.

Keep an eye on performance metrics related to contracts, such as vendor performance under new terms, customer satisfaction during the transition, and compliance with notification and approval deadlines. Regular monitoring helps you catch and address potential issues before they escalate into costly disputes.

Finally, consider scheduling quarterly contract reviews during the first year post-acquisition. These reviews allow you to identify and resolve any lingering issues that weren’t evident during the initial evaluation, ensuring long-term compliance and success.

How to Renegotiate and Combine Contracts

After assessing risks, the next step is to renegotiate unfavorable terms and streamline duplicate contracts. This ensures a smoother integration process and sets the stage for operational efficiency.

How to Renegotiate Contract Terms

Start renegotiations as soon as possible after the acquisition is finalized. Use your position as the new owner, along with any added resources, financial strength, or expanded capabilities, to secure better terms. Emphasize the mutual benefits of these adjustments to your contract partners.

For supplier contracts, focus on areas like volume discounts, improved payment terms, or enhanced service levels. For instance, if your acquisition increases your software licensing needs, consolidate those requirements to negotiate enterprise-level pricing that may not have been an option before.

Customer contracts require a more delicate touch. Highlight the benefits of the acquisition, such as better services, a broader range of products, or improved support. Be cautious about implementing changes that could be seen as taking advantage of the transition period.

Come prepared with detailed negotiation packages that showcase your company’s financial stability, insurance coverage, and operational capabilities. Use this opportunity to address any vague or unclear terms in the contracts - whether related to deliverables, performance metrics, or termination clauses. This proactive approach can help prevent misunderstandings and build trust with your partners.

Once new terms are agreed upon, make sure all changes are documented through formal contract amendments. These amendments should clearly reference the original contract and specify which sections are being modified, replaced, or removed.

Combine or Eliminate Duplicate Contracts

After renegotiating terms, tackle overlapping contracts to simplify your contractual landscape. Compare agreements from both companies side by side to identify redundancies. Common areas of duplication include software subscriptions, professional services, insurance policies, and vendor agreements. Consolidating these can lead to cost savings and operational improvements.

For software licenses, reach out to vendors to merge accounts and explore enterprise plans that offer better per-user pricing. Many vendors provide migration support and temporary overlap coverage to ensure a smooth transition. To avoid penalties, time these consolidations around renewal periods.

When it comes to professional services, evaluate providers like accounting firms, legal advisors, or marketing agencies. Choose the one that offers the best value and consistency. Transitioning to a single provider can reduce costs and streamline operations.

For insurance policies, work closely with your broker to consolidate coverage without leaving any gaps. Begin this process immediately after the acquisition to avoid liability risks.

Vendor relationships require careful handling. If you’re transitioning away from suppliers who served the acquired company, communicate professionally. Give sufficient notice, fulfill current obligations, and maintain positive relationships whenever possible - they might be useful in the future.

Before canceling duplicate contracts, calculate any termination fees. If the penalties outweigh the benefits of consolidation, it might make more sense to let those contracts run their course. Plan a clear transition timeline to avoid disruptions. Overlap key services to ensure continuity before fully switching to new agreements.

Update Your Internal Systems

Once contracts are renegotiated and consolidated, make sure your internal systems reflect these changes. Update your contract management system with all revised terms, including new dates, contact details, renewal schedules, and financial commitments.

Adjust approval workflows to align with any changes in contract authority or spending thresholds. These updates can prevent delays in future decisions.

Educate your teams on the new terms. Sales teams need to understand changes to customer agreements, procurement staff should be aware of updated supplier contracts, and operations teams must know about any adjustments to service levels or vendor relationships.

Ensure your financial systems accommodate new payment schedules, pricing structures, and budgets. For example, accounts payable should reflect consolidated vendor relationships and updated payment terms.

Incorporate the updated contract data into your broader business intelligence tools. This will improve financial reporting, vendor performance tracking, and customer relationship management.

For companies looking to streamline this process, platforms like Clearly Acquired (https://clearlyacquired.com) provide tools to manage contract data, coordinate financial updates, and monitor compliance across departments.

Finally, set up regular monitoring procedures for your updated contracts. This helps ensure compliance with new terms, tracks performance, and identifies opportunities for further improvements. Keep all documentation in a centralized system accessible to key stakeholders. Include details like the reasons for each change, timelines, and responsible parties. This not only preserves institutional knowledge but also strengthens your post-acquisition strategy for long-term success.

Key Steps for Post-Acquisition Contract Review

When reviewing contracts after an acquisition, focus first on those that directly impact revenue, operations, and compliance. Pay close attention to customer agreements, key supplier contracts, and employment agreements, as these often contain change-of-control clauses that might require renegotiation or could even trigger termination rights.

Start by creating a centralized, secure digital repository for all contracts. This repository should serve as a single source of truth, providing real-time, secure access to authorized team members.

Next, prioritize clauses that could require approvals or trigger termination due to ownership changes. Some agreements may demand formal notifications within strict timeframes, while others might need consent from counterparties to ensure the acquisition proceeds without hiccups. These steps are essential for categorizing contract risks effectively in the next phase.

Categorizing Contract Risks

Develop a risk matrix to rank contracts based on their impact on your business:

• High-risk contracts: These might include agreements with automatic termination clauses, large financial commitments, or restrictive covenants that could limit operational flexibility.
• Medium-risk contracts: Typically involve standard vendor agreements or recurring service contracts.
• Low-risk contracts: Often include one-time purchases or agreements that have already expired.

Document Key Findings

Systematically document your findings during the review. Track critical details such as key dates, renewal terms, termination clauses, and any required actions. This information will be invaluable for planning integration activities and forecasting budgets.

Once you’ve gathered insights, it’s time to act. Notify counterparties proactively, especially for key relationships. Arrange face-to-face meetings when necessary to address concerns and explore future partnership opportunities.

Aligning Contracts with Operations

Ensure contract obligations are embedded into your operational plans. Share relevant terms with department heads to facilitate smooth integration:

• IT teams need to understand software licensing requirements.
• HR teams should be clear on employment contract obligations.
• Finance teams must track payment schedules and financial commitments.

Set up monitoring systems to keep tabs on compliance with contract terms and renewal deadlines. Missing renewal dates or failing to provide required notices can result in lost negotiating leverage and unnecessary costs.

Timeline and Tools for Efficiency

The contract review process for small to medium-sized acquisitions typically takes 60 to 90 days, depending on the complexity and volume of contracts. While speed is important, thoroughness is critical - overlooking key provisions can lead to costly issues during integration.

To streamline this process, consider using platforms like Clearly Acquired. These tools simplify contract reviews, track compliance, and keep your team updated in real time, ensuring a smoother transition post-acquisition.

FAQs

Why is it important to review contracts thoroughly after an acquisition?

When acquiring a business, thoroughly reviewing contracts is a must. Why? Because contracts often hold hidden liabilities, legal commitments, or restrictions that could harm your business if overlooked. Skipping this step can open the door to unexpected financial setbacks, compliance issues, or even legal battles - any of which could throw a wrench into your operations and profitability.

Taking the time for a detailed contract review helps you spot potential risks, stay aligned with regulatory requirements, and identify clauses that might need renegotiation. This proactive approach not only minimizes surprises but also sets a solid foundation for the long-term success of your acquisition.

How does contract management software streamline post-acquisition contract reviews?

Contract management software streamlines the often tedious process of reviewing contracts after acquisition. By automating document analysis, it helps you pinpoint key terms, obligations, and potential risks in a fraction of the time it would take manually. This not only speeds up the process but also reduces the likelihood of missing critical details.

On top of that, it provides a centralized, secure repository for all your contracts. This makes it easier to stay on top of compliance, track important deadlines, and maintain accuracy. With fewer manual errors and a more organized system, contract management software boosts both efficiency and confidence throughout the review process.

What should I do if key contract documents are missing after an acquisition?

If important contract documents go missing after an acquisition, your first step should be contacting the other parties involved to request duplicates or original copies. If that approach doesn’t work or legal issues come up, you might need to pursue legal action to obtain accurate copies.

To avoid this problem down the road, think about using a contract management system. Digitally store scanned copies of your contracts and maintain backups with a trusted legal advisor. These measures can safeguard your business and ensure critical documents are always within reach.