Consider a scenario that plays out more often than it should. A private equity-backed buyer is six weeks into the acquisition of a specialty services company. The purchase price is $30 million. The purchase agreement is in near-final form. The representations, indemnification structure, and basket mechanics have all been heavily negotiated. Diligence is substantially complete.
Then buyer’s counsel takes a close look at the target’s three largest customer contracts and discovers that each one contains a change of control provision giving the customer the right to terminate upon a change of ownership, at the customer’s “sole discretion” or upon a determination that the change is “adverse to its interests.” Together, those three customers account for roughly 60 percent of the target’s revenue.
The buyer now faces three bad options: walk away from a deal it has spent real money pursuing, close the transaction and accept the risk that the core revenue base can evaporate with a phone call, or use the discovery to reprice the deal at the worst possible moment for the seller.
This scenario is a composite, but every element comes from patterns that recur in middle-market M&A. The problem is not obscure. It is simply the kind of problem that nobody owns until it is too late.
WHY THIS KEEPS HAPPENING
Buyers and their counsel spend the majority of their negotiating energy on the purchase agreement. The allocation of risk through representations, indemnification provisions, escrows, baskets, and caps absorbs enormous attention, and rightly so. But this focus creates what might be called a “diligence-as-checkbox” problem: the target’s third-party contracts, which are the actual source of the revenue being acquired, get treated as a workstream to be completed rather than a set of deal terms to be understood.
Change of control provisions sit at the center of that gap. They are buried in contracts negotiated years ago, sometimes by different management teams, under different market conditions, and without any thought given to a future sale. By the time someone reads them carefully, the letter of intent has been signed, exclusivity is running, and the deal’s leverage architecture has already hardened. What was a solvable problem on day five becomes an expensive one on day forty-five.
Sellers make the mirror mistake. A seller going to market without first auditing its material contracts for change of control exposure is effectively handing the buyer a loaded repricing tool. Yet this audit is routinely deferred, often because the seller’s advisory team treats it as a Phase 2 task or assumes the contracts are “standard.” In M&A, “standard” is a word people use for contracts they have not read.
The point is straightforward: change of control provisions in the target’s third-party contracts are not a diligence item. They are a deal term. Treating them otherwise is how transactions get repriced, restructured, or killed.
THE ANATOMY OF THE PROBLEM
Not all change of control provisions create equal risk. Understanding the spectrum is essential to triaging the issue, and the differences matter more than most deal teams appreciate.
At the low end are notice-only provisions. These require the target to notify the counterparty of a change in ownership but grant no consent right and no termination right. They are mechanical. They rarely threaten a deal. But failing to comply with a notice requirement can itself create a breach, so they still need to be tracked.
The next tier up involves consent provisions constrained by a reasonableness standard. The typical formulation is “consent not to be unreasonably withheld.” These create process risk and some transaction cost, but they are more manageable than subjective standards because the constraint is judicially enforceable. A counterparty that withholds consent without a commercially reasonable basis is the one at risk of a breach claim. This is not a bright-line objective trigger; it still requires judgment. But it shifts the burden in a way that limits gamesmanship.
The real danger lies in what practitioners should think of as the “veto clause”: provisions granting subjective termination rights. Language giving a counterparty the right to terminate upon a change of control in its “sole discretion,” or upon a determination that the change is “adverse to its interests,” does not create a contractual right in any meaningful sense. It creates an option. The counterparty can use the change of control event to renegotiate the entire relationship, extract concessions, or walk away. A “sole discretion” termination right is a veto dressed up as a contract provision.
Several additional variables determine severity. The distinction between “direct” and “indirect” changes of control matters enormously. A provision capturing only direct ownership changes may not be triggered by a stock purchase or by a sale of equity interests in the target’s parent. But provisions reaching indirect changes of control can capture upstream transactions, holding company restructurings, and even LP-level changes in a fund structure. Whether the provision gives the counterparty a defined exercise window affects the buyer’s post-closing options: a counterparty that has 60 or 90 days to decide whether to terminate is a very different risk profile than one that can act immediately with no advance decision period. And the consequences of termination are not always limited to losing the contract itself. Some provisions include clawback rights, repurchase obligations, or accelerated payment terms that impose costs well beyond the contract’s revenue contribution.
One additional pattern deserves attention. The word “exclusive” in distribution or licensing agreements often means far less than it appears. Call it the “exclusive until it matters” problem: an exclusive distribution right that is terminable at the counterparty’s sole discretion upon a change of control is not, in economic terms, exclusive at all. It is exclusive until the one moment when exclusivity has real value.
THE BUY-SIDE PROBLEM
For buyers, the central failure is timing. Change of control review belongs in Phase 1 of diligence, alongside financial and tax review, not in Phase 2 alongside employment agreements and IP schedules. The reason is that change of control exposure affects three foundational deal decisions: valuation, structure, and closing conditions. Getting any of those wrong is expensive. Getting all three wrong because the issue surfaced late is how deals blow up.
On valuation: a customer contract terminable at the customer’s sole discretion upon a change of control is not worth the same as a contract with a five-year remaining term and no termination right. Where the target has significant customer concentration, this gap is magnified. If the buyer’s DCF model treats future revenue from those contracts as reasonably certain, the change of control provision introduces a valuation question that both sides need to confront. Buyers will argue it is a discount factor. Sellers will argue the risk is speculative and that long-standing customer relationships do not evaporate simply because ownership changes. The side that identifies the issue first has the better argument, regardless of which side that is.
On structure: the distinction between a stock purchase and an asset purchase interacts with change of control provisions in ways that can help or hurt. In an asset purchase, the buyer acquires contracts by assignment, which typically triggers any anti-assignment clause and may require the counterparty’s consent to assignment as a matter of contract law. In a stock purchase, the contracts remain with the same legal entity, so anti-assignment provisions are generally not implicated. But stock purchases and reverse triangular mergers can still trigger change of control provisions, particularly those capturing indirect ownership changes. Buyers who choose a stock or merger structure specifically to avoid the consent to assignment process need to read the change of control language with care. The drafters of those provisions often anticipated exactly that move.
On closing conditions: the buyer faces what amounts to a “pick your problem” choice. Making third-party consent a condition to closing protects the buyer from acquiring a business whose key contracts can be terminated immediately. But it creates two serious secondary problems. First, it gives the counterparty knowledge of the deal and implicit leverage over the timeline. A customer who knows its consent is a closing condition has every incentive to delay, extract concessions, or renegotiate terms that have nothing to do with the ownership change. Second, it gives the seller a potential exit: if the counterparty refuses consent, the closing condition fails and the seller retains the business, possibly to sell to someone else on better terms. The alternative is closing without the consent and accepting the termination risk, which requires the buyer to price that risk into the purchase price, an escrow or holdback, a specific indemnification obligation, or some combination of all three.
Experienced buy-side counsel will push for early identification of change of control provisions, a severity assessment, and a strategy for each material contract before the purchase agreement reaches advanced drafts. That is the window in which the issue shapes the deal rather than disrupts it.
THE SELL-SIDE PROBLEM
Sellers have a different problem, but it starts in the same place: knowing what is in their own contracts. A seller that enters the sale process without a clear map of its change of control exposure is negotiating with incomplete information about its own position.
The pre-market audit should identify, for each material contract: whether a change of control provision exists, whether it requires consent or merely notice, what standard governs the counterparty’s right to act, whether the counterparty has a defined window in which to exercise a termination right, and what the economic consequences of termination would be. This is not complex legal analysis. It requires reading the contracts carefully, which is precisely the step that gets deferred.
Early identification creates a window for what might be called “pre-sale contract hygiene.” If a material contract contains a veto clause, the seller may be able to renegotiate that provision before a buyer appears. The commercial dynamics of that renegotiation are fundamentally different before a sale process than during one. Before the sale, the seller is a going-concern counterparty with an ongoing relationship and no particular urgency. During the sale, the request for a consent amendment signals that a transaction is underway, the counterparty has leverage, and every discussion about the contract becomes a negotiation about the deal.
Sellers who cannot renegotiate problematic provisions before going to market should at minimum have a consent management plan. This means knowing which counterparties will be cooperative, which ones will use the moment to extract value, and how the seller’s relationships with key contacts can be deployed to keep the process moving. The seller who has done this work is in a fundamentally different negotiating position than the one who has not. Preparation does not eliminate the risk, but it does determine who controls the conversation about it.
THE THREE-WAY NEGOTIATION NOBODY TALKS ABOUT
Most M&A commentary treats change of control provisions as a bilateral issue between buyer and seller. That framing misses the real complexity. In practice, these provisions create a three-party dynamic, and the third party often holds the strongest hand.
When a material contract has a veto clause, the counterparty (whether a customer, distributor, licensor, or supplier) holds leverage over both buyer and seller, and often over the deal itself. That leverage is asymmetric and self-reinforcing. The counterparty knows its consent is valuable. It knows the buyer needs the contract to survive. It knows the seller needs a smooth consent process to protect the purchase price. And it knows that buyer and seller, while aligned in wanting the consent, are competing over who pays for it.
This dynamic produces three predictable patterns that deal teams should plan for.
The first is the consent tax. The counterparty conditions its consent on improved terms: revised pricing, extended commitments, accelerated deliverables, or other concessions that extract value from the transaction. The consent tax is sometimes presented as a “relationship reset” or a “comfort letter,” but the economic substance is the same. The counterparty is monetizing its leverage. The allocation of that cost between buyer and seller is itself a negotiation. The buyer argues the seller created the exposure; the seller argues the buyer is the one changing the ownership. Both are right, which is why the issue is hard.
The second is the strategic holdout. A counterparty that is itself a competitor or potential acquirer of the target may withhold consent not to extract concessions but to kill the deal entirely. The counterparty calculates that if the transaction fails, it may acquire the target at a lower price or preserve a competitive relationship that the acquisition would eliminate. This risk is highest in industries where the target’s customer base overlaps with its competitive set.
The third is the opportunistic audit. A customer that has been unhappy with service levels, pricing, or responsiveness views the consent request as an opening to raise grievances that have nothing to do with the ownership change. The consent process becomes a commercial renegotiation, and the buyer inherits not just a contract but a troubled relationship requiring immediate post-closing attention.
Counsel who understand these patterns add significant value by structuring the consent process to manage third-party leverage: sequencing the outreach, controlling information flow, separating the consent request from broader commercial discussions, and ensuring that buyer and seller present a coordinated front before any counterparty is contacted. The worst version of this process is one where buyer and seller approach the counterparty separately, with different messages, and the counterparty plays them against each other. It happens more than it should.
A PRACTICAL FRAMEWORK
The following framework offers a structured approach to evaluating and managing change of control risk.
Triage by severity. Categorize each material contract’s change of control provision on a three-tier scale. Tier 1 (low risk): notice-only provisions and consent provisions with reasonableness constraints. These require compliance but rarely threaten the deal. Tier 2 (moderate risk): consent provisions with subjective standards but meaningful exercise windows and limited termination consequences. These require active management and may need specific allocation in the purchase agreement. Tier 3 (high risk): veto clauses with no exercise window, particularly where they create revenue concentration risk by appearing in contracts that represent a disproportionate share of the target’s income. These demand strategic decisions about deal structure, closing conditions, and purchase price.
Decide the closing condition question. For Tier 3 contracts, the buyer must choose between two imperfect options. Making consent a closing condition protects the buyer but hands leverage to the counterparty and creates a potential seller exit. Closing without consent accepts the termination risk but keeps the deal timeline and information flow under the parties’ control. The decision turns on revenue concentration, the buyer’s read on the counterparty’s likely behavior, and the buyer’s tolerance for post-closing risk.
Structure indemnification with precision. Standard indemnification provisions may not reach post-closing terminations triggered by the change of control. A well-drafted agreement will include a specific indemnity for losses arising from the termination of identified contracts within a defined period after closing, with a corresponding escrow or holdback reflecting the exposure. The key negotiation point is the survival period. Counterparties do not always exercise termination rights immediately; a customer may wait months before deciding to act. Buyers will push for survival periods that extend well beyond the typical 12- to 18-month general window to account for that delay. Sellers will resist open-ended exposure and argue for alignment with the general survival framework. The right answer depends on the specific contracts, the counterparty relationships, and how much risk each side is willing to price into other deal terms instead.
Reflect the risk in the purchase price when warranted. In transactions where material contracts carry Tier 3 provisions and the consent process cannot be completed before closing, the parties will need to decide whether and how the purchase price should account for the exposure. The available mechanisms range from earnouts tied to the retention of key contracts, to straightforward base price adjustments calculated by reference to at-risk revenue, to expanded indemnification in lieu of any price change. Each mechanism allocates risk differently. A price adjustment is immediate and certain; the seller bears the full cost at closing. An indemnity defers the question and may never be triggered; the buyer bears the interim risk. An earnout splits the difference but introduces post-closing complexity. The choice is a negotiation, and the party with the better understanding of the actual termination risk has the stronger position.
* * *
Return to the scenario at the beginning of this article. The deal did not fail. But it was repriced by roughly 20 percent in the final two weeks of negotiation because a problem that was knowable on day one did not surface until day forty-five.
The cost was not the legal analysis, which was relatively straightforward once the provisions were identified. The cost was the lost leverage: the seller’s inability to address the issue from a position of strength, and the buyer’s inability to build the deal around the risk from the outset. In M&A, the problems that cost the most are rarely the ones you didn’t see coming. They are the ones you could have seen, and didn’t look for early enough.
Laurent Campo is a partner at Potomac Law Group, where he advises buyers, sellers, and investors in M&A transactions and securities matters. He can be reached at lcampo@potomaclaw.com.
This article is for informational purposes only and does not constitute legal advice. The scenario described is illustrative and does not reflect any specific transaction or client matter.
