The Novation Clause That Nearly Stalled a Brantford Sale

The situation

The letter that changed the shape of Laura's sale was three paragraphs long, printed on a school board's letterhead, and had sat in a contract file for four years before anyone read it as anything other than routine correspondence. It confirmed the board's latest renewal of its facilities security contract with Laura's company and noted, almost in passing, that the contract could not be assigned to a successor company without the board's written consent. Nobody on Laura's side had thought much about that line when it arrived. It became the first thing Treadstone's diligence team flagged once the sale of Laura's company moved toward a signed agreement.

Laura had built and sold one Brantford company already, a small facilities-services outfit she started in her twenties, before founding her second: a larger security and building-maintenance firm that grew, over twelve years, into a business generating several million dollars a year, much of it from multi-year contracts with the city, two school boards, and a provincial ministry office. Government work of that kind paid reliably and renewed predictably, which was exactly what made the company attractive to a buyer building a platform in the sector. Genevieve, Laura's original operations partner, had stepped back from day-to-day management years earlier to build a career as a real estate agent, but had kept the roughly 20 percent stake she earned helping get the company off the ground, and stood to be paid out alongside Laura on any sale.

The buyer was a regional facilities-management group being assembled by Luc, who had left a career teaching elementary school several years earlier to build what was now his third acquisition in the sector. Luc's team moved quickly through the first months of negotiation, agreeing on a purchase price in the range of $15 million to $30 million based on the company's contract backlog and its multi-year relationships with public sector clients, and circulated a first draft purchase agreement that treated all of the company's contracts, government and private alike, as assets that would simply transfer to the buyer at closing along with everything else.

That assumption sat quietly in the draft agreement for weeks while both sides worked through employee matters, equipment lists, and financing conditions. Laura had signed off on the section without flagging it, and neither she nor Genevieve had reason to think it was anything other than boilerplate. It was Treadstone's review of the underlying government contracts themselves, rather than the draft agreement describing them, that surfaced the problem.

What the documents showed

Government contracts are written differently from ordinary commercial agreements, and the difference matters most exactly at the moment a business changes hands. A private commercial customer can often be assigned to a new owner with nothing more than notice, because the contract usually allows it or says nothing at all about the question. Public bodies tend to write their contracts the other way around by default: the contracting authority, not the seller, decides whether a successor company may step into the seller's shoes, and that decision is usually structured as a novation rather than an assignment.

The distinction is not a technicality. An assignment moves the benefit of a contract, the rights under it, to someone else. Obligations do not travel that way: the original party stays responsible for performance unless the other side agrees to release it and deal with the new party instead, which is a novation, and most commercial contracts also restrict assignment without the other side's consent. A novation ends the original contract and replaces it with a new one between the public body and the buyer, on terms the public body approves fresh, which means the authority gets to reassess the buyer's financial standing, insurance, staffing, and track record before agreeing to anything. For a public body, that is the entire point: it wants the right to decline a successor it has not vetted, particularly where the contract involves access to schools, municipal buildings, or vulnerable populations.

Reviewing the underlying contracts rather than relying on a summary of them, Treadstone found that four of the company's six government contracts, together representing more than half of its annual revenue, required the contracting authority's prior written consent to any change of control, and each defined a share sale of Laura's company as a change of control in its own right. That meant the transaction Luc's team had structured, a straightforward purchase of Laura's shares, would trigger the consent requirement on its own, regardless of how the purchase agreement described the contracts. Two of the four went further still, stating that the authority could decline consent and terminate the relationship instead, at its own discretion, with no obligation to give a reason.

That last point was what mattered most. Luc's draft agreement had priced the deal on the assumption that the government contracts, and the revenue behind them, would transfer automatically at closing. If even one contracting authority declined to consent, the buyer could close the purchase and still lose a material slice of the revenue it had just paid for, with no recourse against Laura beyond whatever the purchase agreement said about that risk. And the purchase agreement, as drafted, said almost nothing about it, because it had been written on the assumption that assignment was all that was needed.

What we did

1. Read every government contract in full, not just Laura's summary of them. The change-of-control language sat buried in the definitions and assignment sections rather than anywhere Laura's team had thought to look, so it had never surfaced in earlier conversations about the deal even though the contracts had been on file for years. Reading the primary documents, rather than relying on a description of them prepared by Laura's office staff, was what caught the issue before the agreement was signed and before the deal was priced around a false assumption.
2. Flagged the novation requirement to both sides immediately. We put the finding in writing to Laura and Genevieve first, explaining what novation meant and why it differed from the simple assignment their draft agreement assumed, then raised it directly with Luc's counsel rather than letting it surface later as a closing condition dispute. Naming the risk early gave both sides time to plan around it instead of discovering it at the closing table, where options narrow quickly and tempers tend to run hotter.
3. Opened novation conversations with all four contracting authorities before the deal terms were finalized. Waiting until after signing would have left the parties committed to a price and timeline before knowing whether the public bodies would even agree to deal with the buyer at all, so we pushed to start those conversations in parallel with the remaining commercial negotiations, submitting the buyer's financial and staffing information to each authority as early as the file allowed.
4. Used the buyer's own draft agreement as leverage in the renegotiation. Luc's team had already described the deal to its own lenders on the assumption that all revenue, including the government contracts, would transfer automatically at closing. That earlier assumption left them with little room to argue the transfer risk should sit entirely with Laura once it came to light, and it became the turning point that shifted the renegotiation of price and risk allocation substantially in Laura's favour.
5. Restructured the purchase price around a holdback tied to consents actually obtained. Rather than close on the original headline price and simply hope every authority approved the transfer, we negotiated a structure where a defined portion of the price was held back at closing and released only once each contracting authority confirmed its consent, spreading the transfer risk across both parties instead of leaving it entirely with one side to absorb.
6. Negotiated an extended closing window to give the public bodies time to process novation requests. Government approval processes do not move at deal speed and cannot be rushed by either party, so we pushed the closing date out by several weeks to give each authority realistic time to review the buyer's insurance, financials, and staffing plans before deciding, rather than forcing a decision on an artificial deadline neither the city nor the school boards had agreed to.
7. Built a fallback allocation for any contract that failed to novate in time. The revised purchase agreement specified in advance exactly how the price would adjust, contract by contract, if one or more failed to transfer by closing, so neither side was negotiating that outcome for the first time under time pressure if it actually happened, which it eventually did with one of the four.

The outcome

Three of the four government contracts novated within the extended closing window. The city and the provincial ministry office approved the transfer within a few months of the request, each after reviewing the buyer's insurance and staffing plans, and one school board approved its own renewal shortly after. The fourth, the other school board, used the change-of-control review as an opportunity to open the contract to competitive bidding instead of automatically approving the novation, something its own procurement rules allowed it to do and that neither side could prevent once the request was on the table.

That contract, worth roughly $900,000 of the company's annual revenue, did not transfer to the buyer. Under the holdback structure negotiated ahead of time, the purchase price was reduced by an amount tied to that lost contract rather than triggering a dispute over the whole transaction, and closing proceeded on the remaining, novated contracts on a date roughly ten weeks later than originally planned. Laura and Genevieve received a lower total payout than the original agreement had contemplated, and Luc's group closed on a smaller revenue base than it had first priced the deal around.

Neither side got the clean outcome it had started out expecting. But because the risk had been identified, priced, and structured for in advance rather than discovered at the closing table, the loss of one contract became a defined price adjustment both sides had already agreed to live with, not a breach, a lawsuit, or a collapsed deal. Laura closed her second company sale a few months later than planned and for less than the headline number first discussed, and moved on to her next venture with the certainty of a completed transaction rather than a drawn-out dispute over a contract nobody could have forced the school board to approve.

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