The Contract Clause That Nearly Sank A Kitchener Business Sale

The situation

Andre had spent fifteen years as a university economics professor in Brazil before moving to Canada. He kept teaching part-time after he arrived, but the plan had always been to eventually own something of his own. His spouse Rejean, a police sergeant, had a stable income that let the household absorb some risk, and together they had spent nearly two years saving and researching before a business broker introduced Andre to an industrial parts distribution company based in Kitchener.

The business had been built over eighteen years by its owner, Keisha, who was ready to retire. It supplied replacement parts and components to manufacturers across the region, employed a dozen people, and had a purchase price of roughly $3.1 million against annual revenue of about $4 million. Andre had negotiated the price directly with Keisha and signed an agreement of purchase and sale with a due diligence condition attached, giving him a window of several weeks to review the company's books, contracts and operations before the deal became binding. He came to Treadstone Law once that condition was already running, wanting a lawyer to lead the review and get the transaction to closing.

The deal was structured as a share purchase: Andre's new holding company would buy all the shares of the corporation that operated the business, rather than buying its individual assets. Share purchases are common where a business has valuable contracts, licences or relationships that are easier to keep intact by leaving the operating company itself untouched — the company simply gets a new owner. That structure works well for continuity, but it carries a specific risk that asset purchases mostly avoid: contracts the company has already signed usually stay in force exactly as written, including any clause that reacts to a change in who controls the company.

What due diligence found

Due diligence is the structured review a buyer's lawyer and accountant do before a business purchase becomes final — reading the financial statements, the corporate records, the leases, the material contracts, and anything else that could change what the business is actually worth. For a company this size, the customer contracts mattered as much as the balance sheet, because a distribution business is only as valuable as the relationships that generate its revenue.

One customer stood out immediately: a manufacturer that alone accounted for roughly $1.6 million of the company's $4 million in annual revenue, tied to a supply agreement with two years left to run. Reading the agreement closely, our team found a standard-looking clause buried in its general provisions: the contract could be terminated by the customer if there was a change of control of the supplying company, unless the customer consented in writing in advance. A change of control clause is written to protect a party from unexpectedly finding itself doing business with someone new — the customer had negotiated the right to walk away, or renegotiate, if ownership of its supplier changed hands, even if operations continued exactly as before.

A share purchase is precisely the kind of transaction this clause was written to catch. Buying the shares of the company would change who controlled it, even though the company's name, staff and day-to-day operations would carry on unchanged. If the customer chose to terminate rather than consent, roughly forty percent of the business's revenue could disappear within its notice period — turning a $3.1 million purchase into something worth considerably less the moment it closed. Andre had priced the deal on the business as it stood, including that customer relationship. Losing it wasn't a theoretical risk to flag in a report; it was a number that could directly wipe out a meaningful share of what he was paying for.

What we did

1. Flagged the clause immediately, before the due diligence period expired. The purchase agreement gave Andre a limited window to raise concerns or walk away. Finding the clause early meant there was still time to negotiate a solution rather than facing a choice between closing blind or losing the deal entirely.
2. Quantified the exposure in plain terms for Andre. Rather than leaving him with a legal description of the risk, we translated it into what mattered to him: roughly $1.6 million of annual revenue, and a purchase price that assumed that revenue would continue. That let him weigh the risk against the deal instead of guessing at it.
3. Made the customer's written consent a closing condition. We amended the agreement of purchase and sale so that closing was conditional on the customer providing its consent to the change of control in writing before the transaction completed. This shifted the risk of a lost customer back onto the deal itself, rather than onto Andre after he had already paid and taken ownership.
4. Coordinated the approach to the customer with Keisha. An outgoing seller usually has the stronger existing relationship with a key customer, and a joint approach — the retiring owner introducing the incoming one — reads very differently to a customer than a stranger's lawyer sending a letter. We worked with Keisha's side to plan the timing and tone of that conversation before it happened.
5. Negotiated a short holdback as a backstop. In case consent took longer than expected, we negotiated a modest holdback of the purchase price, to be released once consent was confirmed, so Andre wasn't forced to choose between an extended delay and closing without certainty on his largest customer relationship.
6. Reviewed the rest of the material contracts for the same pattern. Once one change-of-control clause turned up, we checked the company's other supply and equipment agreements for similar language. Two smaller ones had comparable provisions, both below thresholds that made them lower priority, but Andre closed knowing exactly where the company's contractual risk sat.

The outcome

The customer's written consent came through about three weeks after the request went out, roughly in line with the extended timeline built into the closing conditions. The customer had no real objection to the sale itself — the parts kept arriving on the same schedule from the same warehouse — but it wanted the reassurance of a formal answer to a formal question, which is exactly what the change-of-control clause was designed to produce.

The deal closed on a slightly delayed but still reasonable schedule, with the holdback released once consent was confirmed. Andre took over a business worth what he had agreed to pay for it, with its largest customer relationship intact and documented rather than assumed. Eight months later, that customer was still the company's biggest account, and Andre had renewed two of the smaller supply contracts under his own name without incident.

None of this changed the fundamentals of the business Andre bought. What changed was that the risk sitting inside a contract he hadn't yet read became something identified, quantified, and dealt with before his money was committed — rather than something he discovered afterward, when there would have been nothing left to negotiate.

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