What is a No Assignment Clause?
That no assignment clause says that neither party can transfer or assign this agreement without the written consent of the other party. If you look at the assignment clause, that generally makes sense, because you may not want to be in a contract with a new person that you didn’t initially know about.
Let’s say that some of the most important contracts in your business have a no-assignment clause in them. If this is the case, an issue may come up in the sale, since in that sale you are transferring those contracts to the buyer. If the no assignment clause says you can’t do that, now you have a whole new negotiation to open up with the person on the other side of the contract before you can actually sell your business to the buyer.
When Does this Come Up?
In due diligence, the buyer will look through all of the major contracts for the business, and specifically take a look for these assignment clauses. For example, for a lot of businesses leases of real estate are very important, and almost all leases will say that they can’t be assigned to a new tenant. Well, when the buyers created a new company for your business, there is a new tenant. In this situation, you will have to go to the landlord to get the landlord’s prior approval before selling your business.
Often times, this can end up being a last-minute hitch in the sale of the business, and you’re in this uncomfortable position where you’re not even telling your employees that you are thinking about selling the business, but now you have to go tell your landlord and try to renegotiate.
The issue with the landlord or anyone on the other side of any other contract is that if they know that you have to get their permission to assign the contract because of a sale, they’ll often take it as an opportunity to renegotiate and make a better deal for themselves. This also can take a lot of time, which doesn’t lend itself to actually getting a deal closed for the sale of the business.
What are Assignment Clause Best Practices?
The best practice with assignment clauses is, when you’re actually negotiating the contract, to make sure that the assignment clause allows you to transfer key contracts when you sell your business. You might be thinking that if a buyer is purchasing the equity of your business, that you don’t have to worry about this issue. When you sell the equity of your business, usually all of the contracts of the business go along with the equity, because the business remains intact. However, some assignment clauses understand that this is a possibility, and say things like “The change of ownership of the business is actually an assignment that you need the permission of the landlord or the person on the other side of the contract to approve.”
The best practice for assignment clauses is to negotiate them up front, so that when you sell your business you automatically have the permission to transfer the agreement.