What Happens To The Contracts When A Business Is Sold?

 Posted on June 13, 2022 in Uncategorized

As you probably already know, rarely do all variables align perfectly when you’re ready to sell your business. You’re likely going to have lingering obligations, even up to the day you hand over your keys to the new owner. Many of these loose ends come in the form of business contracts. So, What happens to the contracts when a business is sold? Your contractual obligations stay with you unless you take certain steps to mitigate or eliminate your responsibilities.

How to Handle Outstanding Contracts When You Sell Your Business

You have a handful of options for handling your outstanding contractual obligations during a business sale. Mainly, you can seek a novation or an assignment to discharge or mitigate your responsibilities.  

Contract Novations

Contract novations can be the most solid way to make a clean break between your former business and its customers and vendors. In a contract novation, you, the other party to your original contract, and the buyer of your business can agree that your buyer will take over your responsibilities, and you will no longer be liable to your customer or vendor. With this method, you’re basically writing a new contract

The catch to contract novations is right on the surface: everyone must agree to all the new terms. Not only is it often hard to get everyone to agree to completely release you from previously contracted-for responsibilities, but it may also be hard to track down the other parties to all of your outstanding contracts in the first place.

A contract novation is usually not the best choice when you’re trying to discharge your duties to customers because of the number of parties involved. You will likely have a better chance of negotiating the terms of a novation between you, a longstanding vendor, and your buyer

Is there a simpler way to tackle your outstanding contracts when you’re selling your business? Yes, but you should prepare to have some lingering (though diminished) commitments if you take the simpler route.

Contract Assignments

With contract assignments, you can transfer your contractual responsibilities and your rights to contract benefits to your buyer. This method can be much easier to execute because you don’t have to include the other party to your original contract and you’re already at the negotiation table with your buyer

You can normally assign all of your contractual obligations to your buyer in a sale, but Wisconsin law might invalidate your assignment if: 

• Your assignment materially changes the duties of the other party to your original contract;
• The other party to your original contract has a substantial interest in having you perform the contract duties;
• Your original contract specifically bars delegation of your duties to another party; 
• The assignment would materially increase the burden on the other party to the original contract; or 
• The assignment would impair the other party’s chance of obtaining return performance. 

As you can see, the idea behind a valid assignment is that the other party cannot be put at a disadvantage by the transfer of contractual obligations. Another issue you need to be aware of is that if your buyer fails to properly perform on the contract you assign to them, you can be held liable for breach of that contract

By negotiating strong terms in your business sale contract, a skilled business attorney can help you avoid damages if your buyer defaults on their assigned duties. A business lawyer can also review your existing contracts to ensure that they’re assignable

We Can Give You Confidence in Your Toughest Business Decisions

It can be hard to walk away from a business on your own, and it can be hard to know if you’re moving on in the right way. At Mallery s.c., we can eliminate doubts and concerns when it comes to your business. Our experienced business attorneys give you large-firm quality for small-firm value, often directly from our shareholder-level lawyers. We are leaders in our fields.

We understand business, and we customize our strategies to your specific needs. Don’t fret over business situations and make serious moves on your own. We’re here to help you make the best decisions for a successful future. Contact us online or call us for a consultation