How to Handle Customer Contracts During the Sale of Your Software Business

When selling a software business, few assets are as critical — or as scrutinized — as your customer contracts. These agreements are the lifeblood of recurring revenue, the foundation of enterprise value, and often the focal point of buyer due diligence. Yet, many founders underestimate the complexity and strategic importance of managing these contracts during a transaction.

In this article, we’ll explore how to prepare, structure, and transition customer contracts in a way that preserves value, minimizes risk, and supports a smooth M&A process. Whether you’re preparing for an exit or actively negotiating a deal, understanding the nuances of contract handling is essential.

Why Customer Contracts Matter in M&A

For software companies — especially SaaS businesses — customer contracts are more than just legal documents. They are revenue engines. Buyers, whether strategic acquirers or private equity firms, will evaluate these contracts to assess:

• Revenue predictability: Are contracts long-term, auto-renewing, or cancellable at will?
• Churn risk: Do customers have easy outs or unfavorable terms?
• Assignment rights: Can contracts be transferred to a buyer without customer consent?
• Compliance and liability: Are there indemnities, SLAs, or data privacy clauses that could pose post-sale risks?

In short, the quality and structure of your customer contracts can directly impact valuation, deal structure, and even whether a deal closes at all.

Step 1: Conduct a Pre-Sale Contract Audit

Before going to market, conduct a thorough review of all active customer agreements. This is a key part of pre-LOI due diligence and should be done well in advance of buyer discussions. Focus on:

• Contract uniformity: Are all customers on a standard MSA or do you have a patchwork of bespoke terms?
• Assignment clauses: Do contracts allow for assignment in the event of a sale, or is customer consent required?
• Renewal and termination terms: Are there any contracts nearing expiration or with high churn risk?
• Revenue recognition: Are billing terms aligned with GAAP or ASC 606 standards?

Firms like iMerge often help clients identify red flags early, allowing time to renegotiate or standardize contracts before buyers enter the picture.

Step 2: Understand Assignment and Change-of-Control Provisions

One of the most overlooked — yet critical — clauses in customer contracts is the assignment provision. In an M&A context, this determines whether a contract can be transferred to the buyer without customer approval.

There are three common scenarios:

1. Freely assignable: The contract allows assignment without consent. Ideal for M&A.
2. Consent required: The seller must obtain written approval from the customer. This can delay or derail deals.
3. Silent on assignment: Legal interpretation varies by jurisdiction, but this creates uncertainty.

In a stock sale, contracts typically remain with the entity, so assignment may not be triggered. But in an asset sale — more common in lower middle-market software deals — assignment clauses become a gating issue. Buyers will often require that all material contracts be assignable or pre-approved before closing.

Step 3: Segment and Prioritize Contracts by Strategic Value

Not all customer contracts are created equal. During diligence, buyers will focus on your top revenue-generating accounts, long-term enterprise clients, and any customers with strategic value (e.g., logos that enhance credibility or open cross-sell opportunities).

Segment your contracts into tiers:

• Tier 1: Top 10–20% of customers by ARR or strategic importance
• Tier 2: Mid-sized accounts with standard terms
• Tier 3: Small or legacy accounts with minimal impact

This segmentation helps you focus legal and operational resources where they matter most. For Tier 1 accounts, consider proactive outreach to discuss the upcoming transaction and secure assignment consent if needed.

Step 4: Align Legal, Finance, and Deal Teams

Customer contract handling is a cross-functional effort. Legal teams must review and interpret terms. Finance must validate revenue tied to each contract. And your M&A advisor must communicate implications to buyers.

At iMerge, we often coordinate these efforts to ensure that contract-related risks are disclosed transparently — but also framed constructively. For example, if 80% of revenue is tied to assignable contracts, that’s a strength worth highlighting in the CIM and management presentations.

Step 5: Prepare for Buyer Diligence and Reps & Warranties

Buyers will request a full contract schedule during diligence, including:

• Copies of all material customer agreements
• Summary of key terms (e.g., renewal, termination, assignment)
• Revenue attribution by contract
• Any known disputes or breaches

In the purchase agreement, you’ll likely be asked to make representations and warranties about the validity and enforceability of these contracts. If any are non-assignable or in breach, they may be excluded from the deal or require special indemnities.

To mitigate this, some sellers negotiate reps and warranties insurance or structure earn-outs tied to customer retention post-close. For more on this, see our article on handling earn-outs in the sale of a software business.

Step 6: Communicate with Customers — Strategically

Timing and messaging are critical when informing customers about a pending sale. Premature disclosure can spook clients; delayed communication can violate contract terms or erode trust.

Best practice is to:

• Wait until the deal is signed (or close to signing) before outreach
• Coordinate messaging with the buyer, especially if the brand or service model will change
• Reassure customers about continuity, support, and future investment

For enterprise clients, consider executive-to-executive outreach. For SMBs, a well-crafted email campaign may suffice. In either case, your goal is to retain revenue and preserve goodwill through the transition.

Conclusion

Customer contracts are not just legal formalities — they are strategic assets that can make or break a software M&A transaction. By auditing contracts early, understanding assignment risks, and aligning your legal and deal teams, you can navigate this complex terrain with confidence.

Firms like iMerge specialize in helping software founders prepare for these challenges, ensuring that contract-related issues don’t become deal-breakers — but rather, value drivers.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.