Catching a Change-of-Control Trap in a Family Business Sale

The situation

Vivian, Fernanda and Carlos were the three shareholders of a Milton-based engineering and software company their parents had started decades earlier. Vivian, a software developer, had spent the last several years building out the company's product side. Carlos, a professional engineer, ran the technical and delivery side of the business. Fernanda held a shareholding but had never worked in the company day to day; she had a career of her own outside it. Together the three of them owned the business outright, with no outside investors.

Earlier in the year, they were approached by a private equity-backed consolidator that had been acquiring similar engineering and software firms across Ontario as part of what it called a roll-up strategy: buying a series of smaller, complementary companies and combining them into a larger platform business. The family's company was one of several targets in the consolidator's current round, and the offer was substantial — the consolidator valued the business at roughly $36 million, a number that reflected years of steady revenue growth and a handful of long-standing enterprise customer contracts that made up most of the company's income.

What stood out to Vivian early on was how little negotiation the consolidator seemed willing to do on the paperwork. The purchase agreement they received was, in the words of the consolidator's own deal team, their "standard template" — the same core document, with only names and numbers changed, that they had used across their last several acquisitions in the series. The family retained Treadstone Law to represent their interests as sellers and to review the agreement before anyone signed anything.

What the review found

Standardized acquisition documents are common among serial acquirers, and there is nothing wrong with a consolidator wanting consistency across a series of deals — it speeds up negotiation and keeps legal costs predictable on their side. The risk is that a template built for one kind of company gets applied to another kind of company without anyone checking whether the underlying facts still line up. That is exactly what our review found here.

The company's single largest customer, a long-term contract worth roughly a third of annual revenue, contained a standard assignment clause: if the company were sold or underwent a change of control, the customer had the right to terminate the contract on notice, rather than being automatically bound to continue with a new owner. The consolidator's template agreement was structured as a straightforward share purchase, closing on a fixed date, with no mechanism built in to secure that customer's consent beforehand. If the deal closed as drafted, the change of control would trigger on closing day, and the customer would have a contractual right to walk away with no further obligation — before the family ever saw a cent of the deferred purchase price tied to the business retaining its revenue base.

A second issue sat inside the restrictive covenants. The template included a standard non-compete and non-solicitation clause applying equally to all three shareholders, restricting each of them from working in or starting a competing business for several years after closing. That made sense for Vivian and Carlos, who were staying on to run the combined business under the consolidator's platform. It made far less sense for Fernanda, who had no operational role, no client relationships, and no intention of working in the industry at all — but who would have been bound by the same broad restriction as her siblings simply because the template did not distinguish between operating and non-operating shareholders.

A third, smaller issue involved the company's existing shareholder agreement, which set out a right of first refusal among the three siblings if any one of them wanted to sell their shares. The acquisition documents did not reference or formally address that existing agreement, leaving open a technical argument that the sale could not proceed without each shareholder separately waiving rights they held against each other under the older document.

What we did

1. Reviewed every material customer and supplier contract before touching the purchase agreement. Rather than starting with the consolidator's document, our team asked for the company's key contracts first, so we knew which relationships carried assignment or change-of-control language and which did not. This surfaced the large customer's termination right early, while there was still time to act on it.
2. Flagged the risk to the family and to the consolidator's counsel before any signing date was set. We explained plainly what the clause meant: closing the deal as drafted could hand the customer a free exit at the worst possible moment. The consolidator's team, working from a template built for prior deals with different customer bases, had not caught it themselves.
3. Negotiated a pre-closing consent requirement into the agreement. Instead of closing on a fixed calendar date regardless of customer status, the agreement was revised to make the customer's written consent to the assignment a condition of closing. That gave the family time to approach the customer directly, on their own terms, well before the deal became public knowledge inside the industry.
4. Rewrote the restrictive covenants to match each shareholder's actual role. Vivian and Carlos, staying on as operators, accepted the standard non-compete tied to their ongoing employment. Fernanda's covenant was narrowed to a straightforward non-disclosure obligation and a short, reasonable non-solicitation term, reflecting that she had never worked in the business and posed no competitive risk to it.
5. Formally addressed the existing shareholder agreement. We drafted a short waiver, signed by all three siblings, releasing the right of first refusal specifically for this transaction, closing off the technical argument before it could be raised by anyone after the fact.
6. Coordinated the customer conversation with the company's existing relationship contact. Because Carlos had managed that customer relationship for years, he was best placed to have the conversation once the legal framework was ready. Our role was to make sure the request being made to the customer was narrow, clear, and backed by a contract that would not close without a real answer either way.

The outcome

The customer consented to the assignment within a few weeks, once its own counsel confirmed the new ownership structure did not change the terms of service it was receiving. With that consent in hand, closing proceeded on the revised agreement roughly on the original schedule, with only a short delay to accommodate the consent process. The transaction closed at the previously agreed value of approximately $36 million, split between an upfront payment and a deferred component tied to the business retaining its existing customer base through the following year.

Because the risk was caught and resolved before signing rather than discovered after closing, the family never had to test what would have happened if the customer had exercised its termination right. Had that clause gone unnoticed, the most likely outcome would have been a post-closing dispute over the deferred payment, with the consolidator arguing the customer's departure justified a reduction, and the family arguing the risk was theirs to manage before closing, not after. That kind of dispute is exactly the sort of costly, slow-moving disagreement that a few weeks of contract review, done at the right stage, is meant to avoid.

Fernanda closed the deal with covenants that matched her real relationship to the business, rather than restrictions written for a role she had never held. Vivian and Carlos moved into their new roles under the consolidator's platform with the customer relationship intact and formally consented to in writing, removing any ambiguity about whether the company's revenue base would survive the transition.

What you can learn from this