When a Long-Time Supplier Relationship Became an Acquisition

The situation

The letter came from Kumari, the founder of a specialty machining supplier the management team had dealt with for close to a decade. It was short: she was ready to retire, she wanted the business to go to people who understood it, and she was offering to sell to Carlos and Cristina's group before she spoke to anyone else. There had been no broker, no auction, no competing bids. The two sides had built enough trust over years of steady supply that Kumari simply preferred a private sale to a familiar buyer over the uncertainty of an open market process, and she said as much plainly in the letter itself.

Carlos and Cristina were not machinists. Both worked in medicine, Carlos as an anesthesiologist and Cristina as a surgeon, and their connection to the supplier ran through a separate venture the two of them had backed years earlier that depended on the precision components Kumari's company produced. Over time, as that dependence deepened, they had come to know Kumari's operation well enough to recognize what a well-run supplier looked like, and well enough to know they wanted to keep it running rather than risk it changing hands to someone who might not, whether that meant a competitor looking to fold it into a larger operation or a financial buyer with no particular interest in the trade itself.

The company itself was a substantial operation for its size: a Deep River machining shop with long-standing contracts, a skilled workforce, and specialized equipment built up over decades, valued in the deal at a figure in the tens of millions. Before approaching our office, Carlos and Cristina had already engaged a financial consultant to help them think through the numbers, someone experienced with valuations but not with the legal architecture of an acquisition this size. That consultant had produced a workable financial model and, in the process, had reviewed Kumari's major customer contracts as part of the diligence package, summarizing the revenue each contract represented and when each one was due to renew.

By the time the file reached us, a term sheet had already been drafted around that earlier work, and both sides were eager to move quickly given Kumari's stated timeline for retirement, which she had tied to a family event several months out that she did not want to move. It was only in reviewing the underlying contracts ourselves, rather than the consultant's summary of them, that a specific problem became clear: one buried inside the company's single largest customer contract, the kind of detail a financial review is not built to catch, because it was not asked to look for it.

The legal problem

The company's largest customer accounted for a substantial share of its revenue, and the supply contract with that customer contained a change-of-control clause. In plain terms, the clause gave the customer the right to terminate or renegotiate the contract if ownership of the supplier changed hands, a standard protection for a customer who wants some say over who they end up doing business with rather than waking up one day supplied by an owner they never agreed to deal with. The earlier financial consultant's review had flagged that the contract existed and summarized its payment terms, but had not caught the change-of-control language buried several pages in, because reading a contract for its financial terms and reading it for its legal risk are different exercises, and the consultant's engagement had never been scoped to do the second one at all.

Left unaddressed, that clause meant the acquisition, as structured in the existing term sheet, could trigger the very outcome Carlos and Cristina were trying to avoid: their largest and most important customer relationship becoming unstable at the exact moment ownership changed hands. In a competitive, broker-run sale process, an issue like this is often surfaced early, because multiple bidders and their advisors are independently reviewing the same contracts and comparing notes on risk, and any one of them raising a flag tends to put the issue on the table for everyone. A private, single-buyer deal built on trust does not have that built-in check. Nobody was trying to hide the clause; it had simply never been read closely enough by someone whose job was to catch exactly this kind of thing before a term sheet was signed.

The legal question was not whether the clause existed, it plainly did, but how to structure the transaction so that it did not do damage. Ontario corporate acquisitions can generally be structured as either a purchase of the company's shares or a purchase of its assets, and the two structures interact very differently with a change-of-control clause in an existing contract. A share purchase changes who owns the company without necessarily changing which legal entity holds the contract, while an asset purchase moves the contract itself to a new party, which usually requires the customer's agreement, though not always: what the contract's own assignment provisions say governs, since some agreements permit assignment freely, and the benefit of a contract can often be assigned without consent even where transferring the obligations still requires the customer to come on side. Getting that structural choice right, and getting the customer's cooperation secured before closing rather than after, was the difference between a stable transition for the whole business and a costly, disruptive one that could have cost the new owners their biggest account within months of taking over.

What we did

1. Reviewed every material contract in the diligence file directly, rather than relying on the earlier consultant's summaries, because the change-of-control issue had already demonstrated that a financial review and a legal risk review ask different questions of the same document, and there was no way to know, without checking, whether that gap had been an isolated oversight or a pattern running through the whole file.
2. Confirmed the deal would proceed as a share purchase rather than an asset purchase, since a share sale would keep the existing corporate entity, and therefore the existing contract, intact, avoiding an automatic requirement to seek the customer's consent for an assignment that a different structure would have forced, and preserving the company's operating history and existing licences along with it.
3. Analyzed the exact wording of the change-of-control clause to determine whether a share sale still technically triggered it, since some clauses are drafted broadly enough to capture any change in beneficial ownership regardless of which structure is used, and this one, on close reading, arguably did, which meant the structural choice alone could not fully resolve the risk without the customer's own cooperation.
4. Advised Kumari and the management team to approach the customer proactively before closing, rather than waiting to see whether the clause would be invoked after the fact, because a customer who learns about an ownership change from a courtesy call feels very differently than one who finds out after the fact from a change in invoices or a new signature on an order confirmation.
5. Negotiated a consent and continuity letter with the customer confirming the existing supply terms, pricing, and delivery commitments would all carry forward unchanged under the new ownership, giving both the customer and the new owners a clear written record of what had been agreed rather than leaving the relationship to informal assurances that could be remembered differently by either side once the new ownership had been in place for a while and memories of the original conversation had started to fade.
6. Rebuilt the purchase agreement's representations and warranties to reflect the change-of-control issue explicitly, including a specific indemnity running in Kumari's favour if the customer relationship deteriorated for reasons unrelated to anything the new owners did after taking over, since fairness required that she not be held responsible after closing for a downturn she had no part in causing and no ability to influence once she had stepped away from the business entirely.
7. Reviewed the remaining customer and supplier contracts for similar clauses now that the first one had been found, since a single missed issue in a diligence file is often a sign that the same category of clause exists elsewhere and had simply not been checked for systematically the first time through, and the cost of confirming that directly was small next to the cost of another surprise turning up after closing.
8. Coordinated the closing timeline around the customer conversation, delaying signing by several weeks so the continuity letter was fully in place before ownership formally changed, rather than closing on the original schedule and hoping the conversation went well afterward, since an unhappy customer discovered after closing is a far harder problem to fix than one addressed before anyone signs.

The outcome

The customer, once approached directly and given a clear explanation of who the new owners were and why the supply relationship would continue on the same terms, signed the continuity letter without difficulty. The relationship had been built on years of reliable delivery, and the customer had no particular reason to want a change, only a contractual right to be consulted about one, which the earlier process had nearly skipped past entirely.

The acquisition closed several weeks later than Kumari's original timeline, structured as a share purchase with the continuity letter and the revised representations built into the final agreement. Kumari accepted a modest reduction in the closing price in exchange for the indemnity provision protecting the new owners if the customer relationship soured for reasons connected to the ownership change itself, a concession she was willing to make given how close the deal had come to closing with an unaddressed risk sitting inside it.

Carlos and Cristina took ownership of a company whose single biggest customer relationship had been formally confirmed rather than simply assumed to be fine, and the process of checking the remaining contracts turned up no further surprises, though it did add several weeks of work that neither side had originally budgeted for. Kumari retired on a timeline close to what she had originally wanted, just later than the first draft of the deal had promised, and the earlier financial consultant's work was not wasted, it simply needed a legal review layered on top of it before anyone signed anything final.

The management team stepped into ownership of a business whose day-to-day operations they already understood well from years as a customer, but whose largest contractual relationship they now understood as owners as well, with a written continuity letter to point to rather than an assumption carried over from the years before the sale. That distinction, between trusting a relationship informally and having it documented, was the entire difference between the deal as first proposed and the deal that actually closed.

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