- There's no single legal test — it comes down to how much the contract matters to the value of what you're buying.
- Reading a contract's headline terms isn't enough — certain clauses can materially change what you're actually buying: - Assignment and change-of-control clauses.
A business's revenue is only as reliable as the contracts behind it. A seller's summary of "long-term customer relationships" or "a solid supplier arrangement" means very little until you've actually read the underlying agreements — because a contract can be cancelled on short notice, assigned away by the seller, or quietly terminated the moment the business changes hands, no matter how it's been described to you.
Reviewing material contracts is one of the more time-consuming parts of due diligence, and one of the easiest to underinvest in when a deal is moving quickly. This article explains what makes a contract material, what to look for, and why it matters to the price you're paying.
What Makes a Contract "Material"?
There's no single legal test — it comes down to how much the contract matters to the value of what you're buying. A contract is generally worth close review if it involves any of the following:
- A significant share of the business's revenue or gross margin
- A key supplier the business depends on to operate day to day
- A long remaining term, or an automatic renewal the business relies on
- Exclusivity — either the business's exclusivity to a customer, or a supplier's exclusivity to the business
- Real property, equipment, or intellectual property essential to operations
- Personal guarantees or security given by the business or its owner
A contract that's small in dollar terms but hard to replace — a sole-source supplier, for instance — can be just as material as a large customer agreement.
Categories of Contracts Worth a Close Read
| Category | Why It Matters |
|---|---|
| Major customer agreements | Concentrated revenue is only as reliable as the contract securing it |
| Supplier and vendor agreements | Loss of a key supplier can disrupt operations immediately |
| Commercial leases | Assigning a lease generally needs landlord consent, and lease terms shape what the business can actually do at that location |
| Licensing and IP agreements | Confirms the business actually has the right to use what it's selling or operating under |
| Financing and loan agreements | Reveals security interests, guarantees, and repayment obligations that may need to be dealt with at closing |
| Key employment or consulting agreements | Identifies retention risk and any obligations tied to people the business depends on |
| Franchise agreements (if applicable) | Franchise transfers involve separate disclosure and consent requirements under the Arthur Wishart Act (Franchise Disclosure), 2000 |
Clauses That Can Upend a Deal
Reading a contract's headline terms isn't enough — certain clauses can materially change what you're actually buying:
- Assignment and change-of-control clauses. Many contracts require the other party's consent before they can be assigned to a buyer, or before a change in the business's ownership takes effect. Without that consent, a "material contract" you're counting on may not survive the sale.
- Exclusivity terms. Confirm exactly what's exclusive to whom, and for how long — exclusivity can cut either in the business's favour or against it.
- Termination rights. Some contracts allow the other party to terminate on relatively short notice, or specifically upon a sale of the business, regardless of the stated term.
- Renewal mechanics. An "automatic" renewal that actually requires advance written notice to trigger can quietly lapse if nobody flags the deadline.
- Pricing and escalation terms. Confirm whether pricing is locked in, subject to review, or tied to something outside the business's control.
Why This Matters for the Revenue You're Relying On
Your offer for the business is built on an assumption that its current contracts will keep generating revenue after closing. If a major customer contract can be terminated on short notice, or a key supplier agreement doesn't survive a change of ownership, the business you actually end up owning may look meaningfully different from the one described in the financial statements. This is exactly why contract review sits alongside financial due diligence rather than after it — the numbers and the contracts need to be read together.
Getting the Contracts Into the Deal Properly
- [ ] Request a complete list of material contracts from the seller, not just the ones they consider important.
- [ ] Read each contract's assignment, change-of-control, and termination provisions specifically — don't rely on a summary.
- [ ] Identify which contracts need third-party consent to transfer, and start that process early, since consents can take time to obtain.
- [ ] Confirm whether any contract includes personal guarantees from the seller that need to be released or replaced at closing.
- [ ] Build seller representations into the purchase agreement confirming all material contracts are disclosed, in good standing, and not in default.
- [ ] Make obtaining key consents a condition of closing, rather than something addressed after the fact.
Frequently asked questions
Does every contract need to be reviewed, or just the big ones?
Focus your time on contracts that are material to the business's value — large revenue contributors, hard-to-replace suppliers, and anything tied to real property, key equipment, or personal guarantees. Smaller, routine, easily replaceable contracts generally warrant less scrutiny.
What happens if a contract needs consent to assign and the other party refuses?
It depends on the contract and the deal structure. Sometimes the parties negotiate around it, sometimes the contract is excluded from the deal, and sometimes it becomes a condition that must be resolved before closing. This is exactly why consent requirements should be identified early, not discovered at the closing table.
Does a share purchase avoid the need to review contracts as closely?
Not really — the contracts still matter just as much to the value of the business, but the mechanics differ. In a share purchase, contracts generally stay with the corporation without needing assignment, unless the contract itself includes a change-of-control clause triggered by the sale. In an asset purchase, contracts typically need to be formally assigned, which is more likely to require third-party consent.
Who should review the contracts — the buyer, or a lawyer?
Both. You know the business operationally and can flag what seems important; a lawyer is best placed to spot the assignment, termination, and change-of-control language that isn't always obvious from a plain read of the contract.
This is a business purchase or sale question
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