Why Contracts Matter in an Exit Strategy
Every deal, whether it is a share sale, an asset purchase, or a form of external investment, depends on investors knowing your business represents a sound, low-risk purchase. You can prove this by demonstrating your company has built its foundations on reliable, legally sound relationships with your customers, suppliers and other interested parties. Contracts investors look for add to their level of commercial confidence in your business rather than, as can be the case, detract from it.
During any investment due diligence contracts’ exercise, it is likely that your commercial contracts will be put under the microscope by the purchaser or their legal representatives. Buyers will assess whether:
- Your customer contracts are enforceable.
- Your supplier agreements protect your business.
- Your intellectual property is genuinely owned by your company.
- Your operations are compliant with the law.
The outcome of assessing contract clauses for investment purposes, as described above, will either help or hinder your exit. It is easy to see that success will come from having everything in good order. Strong commercial contracts are considered a sign of a successful, well-ordered business. Conversely, poor contracts are often viewed as a red flag, suggesting weak performance and, particularly concerning for potential buyers, problems ahead.
Key Clauses Investors Care About
The reason potential investors review your contracts is the importance of certainty, protection, and commercial sense to them. Key clauses act as markers of whether your business is legally resilient. The absence of contractual protections can raise doubts about valuation or, indeed, the viability of any purchase overall. By understanding and strengthening the contract clauses that matter most to investors, you can position your business as a safe and attractive prospect.
Assignment and Change of Control Clauses
It’s not guaranteed that a change in ownership means a smooth transfer of commercial contracts. A correctly applied assignment clause in your commercial contracts, however, can help. It should allow signed contracts with customers to be transferred to a new owner with minimal fuss.
Conversely, an active change of control clause in a customer contract gives counterparties the right to terminate if control shifts. Such clauses are clearly unattractive for buyers and should be avoided by business owners contemplating their exit.
Overall, investors will want to see balanced provisions that protect your relationships but don’t jeopardise continuity post-sale. Aligning these clauses with your business’s Heads of Terms can make a significant difference during negotiations.
Liability Caps and Indemnities
If something goes wrong as you operate your business, liability caps can protect you from excessive costs. Without them, potential investors are likely to see unlimited financial risk, which, understandably, may represent a significant red flag. Indemnity clauses can also be sticking points. Overly broad indemnities in supplier contracts, for example, may put your business on the hook for risks beyond your control. Again, these are likely to encourage investors to look elsewhere.
Investors prefer ‘exit ready’ contracts that fairly and transparently balance risk between parties. Working with solicitors to draft appropriate caps and indemnities will reassure future buyers that the business is not carrying hidden liabilities.
Termination and Renewal Provisions
From an investor’s perspective, contracts should balance value and flexibility. Automatic customer renewal clauses can sometimes lock a business into unfavourable terms; another red flag. On the other hand, commercial contracts that can be terminated easily may leave revenue streams vulnerable.
The goal is to demonstrate scalability and predictability. Investors want reassurance that your contracts will endure through any transition, without creating barriers to restructuring or integration.
Exclusivity and Non-Compete Clauses
Exclusivity clauses can limit your freedom to work with the broadest range of possible customers or suppliers. Constraints might raise concerns about dependencies in potential investors. Similarly, non-compete clauses that restrict your business after an exit may also reduce attractiveness to investors.
A careful balance is needed, protecting your interests while keeping agreements flexible enough to support growth and future investment. Investors are quick to spot commitments that tie your hands unnecessarily, which will impact their decision-making.
Intellectual Property Ownership in Contracts
For many modern businesses, IP is the most valuable asset. If your contracts with developers, consultants, or suppliers don’t clearly assign ownership of intellectual property to your company, investors will see a significant risk.
It is essential to ensure every agreement specifies that IP created under its terms is owned by your business. Linking this to your copyright and trademarking strategy demonstrates control over your brand and innovations. Without this, investors may fear future disputes that undermine valuation.
Common Red Flags Investors Spot in Contracts
Investors and buyers walk away from deals when they encounter the same recurring issues in contracts. Some of the most common red flags include:
- Vague, poorly worded or missing clauses
- One-sided supplier agreements
- Excessive or unlimited liability exposure
- Non-compliance with industry regulations
- Outdated or unsigned contracts
Even a single problematic contract can slow down the progress of an acquisition or jeopardise an otherwise promising deal in its entirety. It pays for business owners to have commercial contracts and agreements in good order, well in advance of their exit planning.
How to Prepare Contracts for Exit Due Diligence
Preparation is everything. It is not unusual for businesses to start reviewing their paperwork three years before implementing an exit strategy. If you wait until investors request contracts during due diligence, it may already be too late.
Practical steps include auditing your contracts with customers and suppliers. It is helpful to standardise them, too. They should be robust and legally sound, reflecting current laws and industry practices. Assignment, liability, renewal, and IP clauses deserve particular attention and should align with potential investor expectations. Nobody likes surprises.
Investors will expect high standards of document control and filing. Having documentation ready and available for review will make M&A activity run much more smoothly than struggling with incomplete and inaccurate records.
Our final tip is to get advice from specialist solicitors. If you’re planning your exit, legal experts in M&A can provide guidance, highlight weaknesses, recommend fixes and, essentially, put you in the strongest possible position to negotiate your way out of your business with the minimal heartache.
If this all sounds onerous, it’s worth reflecting on the fact that the effort you put into preparing contracts for investors is likely to be repaid when it comes to negotiations.
Why Legal Support is Essential for Exit-Readiness
Exit strategy contracts don’t happen by chance. They require careful drafting, regular review, and strategic negotiation. Investors will often have their own solicitors combing through your agreements. Without your own expert legal support in business contracts, M&A, and investment on your side, it’s easy to end up in a weakened position.
If you’re planning an exit strategy, why not choose to work with experienced commercial contract solicitors helping clients in Scotland, Ireland, and across the UK? From reviewing liabilities to protecting your intellectual property, legal support can transform contracts from potential deal-breakers into value drivers.
If you’re considering an exit in the next few years, now is the time to act. Speak to Jamieson Law today to ensure your ‘exit ready’ contracts withstand investor scrutiny.
Frequently Asked Questions
What is an ‘exit ready’ contract?
‘Exit ready’ in contracts means your agreements contain investor-friendly clauses, designed to withstand due diligence and protect your business valuation.
Which contract clauses do investors look at most closely?
Key clauses include assignment and change of control, liability caps and indemnities, termination and renewal provisions, and IP ownership clauses.
How can weak contracts affect a business sale?
Weak or vague contracts can delay due diligence, reduce valuation, or cause buyers to withdraw entirely.
Do SMEs need to prepare contracts for an exit in advance?
Yes. Investor-friendly contracts should be standard practice well before a sale. Ideally, SMEs should start preparing at least 2–3 years before exit.
