A Hybrid Deal Structure That Kept One Contract Alive

The situation

Ji-ho, a surgeon, and Kostas, a technology executive, had spent several years co-owning a medical equipment sterilization and logistics company that served clinics and small hospitals across central Ontario. Ji-ho had started it after growing frustrated with unreliable turnaround times from outside vendors; Kostas came on as a partner not long after, rebuilding the scheduling and route software that let the business scale past its early growing pains. By the time they came to us, the company was solidly profitable and looking to expand its footprint.

A Barrie-based competitor, owned by Eleni, was for sale. The two businesses ran the same kind of operation — collecting, sterilizing and returning reusable medical equipment on a route basis — and Eleni's company was a close match in size, with annual revenue in the range of $6,000,000 to $7,000,000. Ji-ho and Kostas saw an obvious fit: overlapping routes could be consolidated, and Eleni's client relationships would round out coverage in an area their own company had never fully served. They agreed on a purchase price in principle, roughly $7,200,000, and asked us to run the legal side of the acquisition.

What due diligence found

The starting assumption, as with most deals this size, was a straightforward asset purchase: the buyer takes the equipment, the vehicles, the client contracts, the goodwill and the employees it wants to keep, and leaves behind whatever liabilities it doesn't want — old lawsuits, undisclosed tax exposure, disputes with former staff. An asset purchase is usually the safer route for a buyer for exactly that reason, and it was where we started.

Reviewing Eleni's material contracts changed that plan. Her single largest customer — a regional group of clinics responsible for close to a third of her company's revenue — held a service agreement with a clause common in long-term institutional contracts but easy to miss without a careful read: the agreement could not be assigned to a new owner without the customer's prior written consent, and it gave the customer the right to terminate outright if the business changed hands without that consent being obtained. An asset sale is, legally, exactly that kind of change — the contract would need to be assigned from Eleni's operating company to Ji-ho and Kostas's company, triggering the clause.

The risk was not hypothetical. The customer's procurement department had a reputation, well known to Eleni, for using ownership changes as leverage to renegotiate pricing downward, and there was a real chance consent would come with unpalatable conditions or simply be delayed past the planned closing date. Losing or discounting a third of the target's revenue would have changed the value of the deal — and possibly killed it.

There was a second layer to it. That particular contract, along with the warehouse lease that housed the equipment used to service it, sat inside a separate numbered company that Eleni had incorporated years earlier for reasons that had nothing to do with this issue — mainly to isolate that one facility's liability from the rest of the business. The rest of the operation — the general client base, the vehicle fleet, the staff, the day-to-day operating contracts — sat in Eleni's main operating company. That structural accident turned out to be useful.

What we did

1. Reviewed every material contract before committing to a structure. Rather than accepting the asset-purchase assumption everyone had started with, we had the target's contracts reviewed early, before the purchase agreement was drafted, specifically for change-of-control and assignment restrictions. That is where the anti-assignment clause surfaced, well ahead of the deadline pressure that closing weeks tend to bring.
2. Proposed a hybrid structure instead of a single deal type. Because the contract and the warehouse lease sat inside their own numbered company, we recommended buying that numbered company by share purchase — the company's ownership would change, but the contract itself would never be assigned or transferred, since the corporate entity holding it would simply have new shareholders. The rest of the business — the operating company, its equipment, vehicles and general client roster — would still be bought as an asset purchase, preserving the liability protection Ji-ho and Kostas wanted for the parts of the business that carried more risk.
3. Confirmed the anti-assignment clause did not also capture a change of control. Some institutional contracts are drafted broadly enough to treat a change in who owns the corporate shareholder as equivalent to an assignment. This one was not — it referred specifically to assignment of the agreement itself, not to a change in the numbered company's ownership. We confirmed that reading carefully before relying on it, since getting it wrong would have recreated the exact problem the structure was meant to avoid.
4. Allocated the purchase price between the two pieces. Roughly $5,400,000 of the total price was allocated to the asset purchase — the operating company's equipment, vehicles, client contracts and goodwill — and roughly $1,800,000 to the shares of the numbered company holding the warehouse lease and the sensitive contract, together totalling the agreed $7,200,000. The allocation mattered for tax purposes on both sides and had to be negotiated as carefully as the price itself.
5. Built both purchase agreements to close simultaneously. An asset purchase agreement and a share purchase agreement were drafted and negotiated in parallel, cross-referenced so that neither could complete without the other, with a shared closing date, shared conditions and coordinated funds flow so the transaction functioned as one deal even though it was legally two.
6. Addressed the customer relationship directly, without triggering the clause. Because the contract wasn't being assigned, formal consent was never required. Eleni still introduced Ji-ho and Kostas to the customer's account manager before closing as a courtesy and a transition step, on the understanding that no approval was being sought or needed — a distinction we were careful to keep clear in every conversation, since asking for consent that wasn't legally required would have invited exactly the scrutiny and renegotiation the structure was built to avoid.

The outcome

The deal closed on the original schedule. Ji-ho and Kostas took over the operating business by asset purchase, and became sole shareholders of the numbered company holding the warehouse lease and the large institutional contract by share purchase. The contract carried on exactly as written, with the same terms, the same rates and no interruption of service — because, as a matter of law, it had never been assigned or terminated. It simply continued in the hands of a company that now had different owners.

The customer relationship survived the transition without incident. The account manager who had a reputation for using ownership changes to extract concessions was never given the opening to do so, because there was no consent request to negotiate around. Within a few months, Ji-ho and Kostas had folded the acquired routes into their existing scheduling system, and the revenue that had been at risk stayed exactly where it was projected to be.

Nothing about this outcome required a court, a dispute or a difficult conversation after closing — which is the point of a prevention story. The risk to a third of the target's revenue was real, and it was identified and designed around before it ever became a problem the buyers had to react to. Had the contract review happened later, or been skipped in favour of a standard asset-purchase template, the anti-assignment clause would likely have surfaced only when the customer received notice of the change — at which point the leverage would have run entirely the other way.

What you can learn from this