Analyzing Termination Rights in Customer Contracts: M&A Due Diligence Essentials

Evaluating customer contracts during M&A due diligence? Understand the critical impact of early termination rights on target company valuation and revenue stability. Our comprehensive guide explores key termination clauses, including for-cause vs. without-cause provisions, notice periods, and financial implications. Learn how to assess termination risk, protect recurring revenue streams, and negotiate stronger contract terms. Essential reading for M&A professionals, corporate lawyers, and business development executives involved in tech, SaaS, and service-based company acquisitions.

Termination for convenience

This is when the other party can terminate the contract at their convenience (without having to show cause or fault on the part of the target company).

Consider the following when reviewing this clause:

• whether the counterparty is required to give notice

• what is the notice period (if any)

• the earliest the contract can be terminated (e.g. do they have to wait a minimum amount of time to pass before terminating)

• early termination fees or penalties

Termination for change of control

Consider whether the proposed transaction will be considered a ‘change of control’ as per the definition of change of control in the contract. If there will be a change of control, consider if the counterparty has a right to terminate the contract.