The Exit Ready Series · Post R.7
View the full series →Contracts: The Ticking Time Bombs in Your Filing Cabinet
Your filing cabinet contains agreements you haven't read in a decade. The buyer's attorney is going to read every one of them.
Ed Kowalski has a handshake lease on his Meridian warehouse.
His landlord Tom has been a friend for 22 years. When the original lease expired in 2014, Tom said "let's just keep going" and Ed said "sounds good." The rent has been adjusted twice in conversations that did not produce paper. Ed thinks the last increase was 2022. Tom thinks it was 2021. Neither has a file.
Ed will tell you his lease is one of the cleanest things about his business.
When the buyer's attorney asks for a copy in week two of diligence, Ed will have nothing to send.
What a Contract Actually Is, to a Buyer
To the founder, agreements are administrative infrastructure. They exist so the business can operate.
To a buyer, those agreements are the business. The contractual rights to generate revenue, use facilities, buy from suppliers, employ people, and be protected from competitors. If you sell the business, you are selling those rights. If the rights are unclear or unenforceable or cancelable on the sale, what the buyer is buying is smaller than what you thought you were selling.
The Change-of-Control Clause
The most expensive clause in your contracts is the one most founders have never looked at.
Change-of-control provisions say: if ownership changes, the counterparty has the right to terminate, renegotiate, or impose conditions. They appear in customer contracts, technology licenses, leases, loan documents, and franchise agreements.
When you sell, every change-of-control clause fires at the same time. Counterparties get to say "we're leaving" or "we want a better deal." Enough exercises and the value of the business drops between signing and closing.
Meridian's largest supplier contract — a 5-year exclusivity arrangement with its primary equipment distributor — contains a change-of-control clause requiring written consent before any ownership transfer. Ed signed it in 2019. The attorney who negotiated it retired in 2020. Ed does not remember the clause.
Handshake Agreements Are Real. They Are Just Hard to Sell.
Ed's handshake lease is not legally void. Oral contracts are enforceable in most jurisdictions, and a 22-year course of dealing establishes terms by performance.
The problem is not legal. The problem is transferability. If the contractual right is an oral agreement between you and your golf partner, the buyer is purchasing something that exists in the memories of two people. Not a document they can produce in a dispute. Not something their lender will collateralize.
Handshake agreements fall into three buckets at a buyer's feet. The buyer requires conversion to a written agreement before close — which means renegotiating with a counterparty who now knows you are selling, which means you no longer have leverage. The buyer prices the uncertainty in and reduces the offer. Or the buyer excludes the handshake entirely and makes formalization a closing condition — Ed has to go back to the counterparty, negotiate from a position of weakness, and accept whatever terms he can get. The new terms flow into the buyer's forward model and the valuation moves down. Ed gets hit twice: once on the contract he had to accept, once on the deal price that now reflects it.
What Ready Looks Like
A founder ready for the contract review has every material agreement in a searchable index — executed copies, not drafts. Each record carries structured fields: counterparty, contract type, effective date, expiration, renewal terms, change-of-control language, and termination rights.
A change-of-control view shows every contract with that clause and a status: consent secured, in process, or not yet requested.
Handshake agreements have all been converted to written form — lease, supplier, maintenance, customer pricing, sales commission. Each one papered while the founder still has leverage, before the buyer is in the room.
For Meridian, none of these were true.
Ed sat with his M&A attorney to review the contract findings. 73 material agreements. 14 handshake or oral. 19 with change-of-control clauses Ed had not known about. 6 expired and operating month-to-month.
The lease alone took six weeks to convert. Tom was willing. Tom's daughter, who had been added to the property title without Ed knowing, had to consent. The buyer required a 10-year term. Tom required a rent bump to make the longer term feel fair.
Ed asked whether any of this could have been avoided.
"All of it. 12 months ago."
What this cost Ed: $145K.
Three compounding factors drove the number. Change-of-control consents were not pre-secured — the supplier exclusivity agreement alone took 41 days for formal consent, during which the buyer adjusted valuation. Handshake agreements were unconverted — the lease conversion produced worse terms, and other handshakes were excluded from the deal entirely. And the material contract inventory did not exist — the buyer's attorney rebuilt what should have been ready, billed the time to the deal, and charged it back through the purchase price.
Another cut. The deduction peaks at $3.5M not because any single finding is large enough to walk away from, but because twenty-one of them add up.
Don't be Ed.