The Direct Answer
You must look at your contracts 36 months before selling your business because most owner-drafted contracts are not assignable and will not survive a buyer’s due diligence scrutiny. If your contracts cannot transfer to a new owner, the buyer cannot acquire the revenue they were planning to acquire — and the multiple compresses immediately. The 36-month window gives you time to work with legal counsel, strengthen three or four key contract provisions, give your sales team time to adjust to the new language, and prove two to four years of revenue under contract by the time a buyer is reviewing your diligence binder. Combine assignable multi-year contracts with monthly, quarterly, or yearly recurring revenue and you arrive at the closing table with proof that real money is coming in on day one. Without that proof, you arrive with hope. Buyers pay for proof, not hope.
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Why Contract Assignability Is The First Question
Contract assignability means whether the contract can be transferred to a new owner without the customer’s separate consent. Most contracts that were never reviewed by an M&A attorney are not assignable. The original drafter — often an in-house person or a general business attorney — wrote the contract for the day-to-day operations, not for an eventual sale. When the buyer’s due diligence team reviews the contracts during the transaction, they ask one question first: can we transfer these to the new entity at close?
If the answer is no, every contract becomes a re-negotiation. Every customer has to consent to the transfer. Every customer who refuses or stalls represents revenue the buyer is not actually acquiring. The deal value drops by the amount of contract revenue that cannot be cleanly transferred. The READY gateway assessment surfaces this exact issue before you sign an LOI.
The 36-Month Window And Why It Matters
Thirty-six months is the working floor for contract preparation. Less than that and you do not have time to renew the entire contract book under new language. The math is simple — most contracts auto-renew or come up for renewal annually, sometimes every two years. If your contracts are one-year terms, you need at least 24 to 36 months to cycle every contract through under the new assignable language. If contracts are two-year terms, the window stretches longer.
The window also accommodates customer relationship management. You do not announce to customers that you are preparing for sale. You simply present the new contract language as a routine update during the next renewal. By the time you reach the closing table, every contract in your binder uses language that survives diligence. Owners who try to compress this work into a six-month window before sale typically end up with mixed contract books — some assignable, some not — and the buyer prices the gap.
What Provisions Need To Be Strengthened
Three or four contract provisions usually need attention. The assignability clause itself — explicit language permitting transfer of the contract to a successor entity without customer consent. The change-of-control clause — what happens to the contract if the business is sold, acquired, or restructured. The term length and renewal mechanics — auto-renewal versus opt-in renewal, notice periods, and termination triggers. The damages and liability provisions — limitations of liability that survive transfer and protect both old and new ownership.
These provisions are not boilerplate. They require a real M&A attorney who has reviewed dozens of transaction contracts to draft them properly. The cost is typically three to ten thousand dollars in legal time for a complete contract template refresh. The return at exit is the difference between a clean diligence pass and a multiple-compressing diligence gap.
Why You Do Not Announce This To The Team
The contract work happens in private conversations with legal counsel. You do not tell the sales team that the contracts are being prepared for an eventual sale. You do not announce a project name. You simply update the contract template and roll it out as standard practice for new deals and renewals. Premature disclosure to the team creates anxiety, retention risk, and competitive exposure if word leaks.
Sales teams sometimes get nervous about changes to contract language anyway. New provisions can feel like restrictions or complications. Giving the team time to absorb the new language, ask questions, and get comfortable using it in customer conversations matters. Three years is enough time for the new contract language to become routine. Six months is not. The team’s comfort with the new contracts shows up at the closing table as confident reference calls when the buyer talks to your salespeople. The BENCH framework covers the organizational depth this kind of preparation produces.
The Multi-Year Contract As Multiple Lever
If you can show a buyer that you have two, three, or four years of revenue under contract at close, the buyer can underwrite the acquisition with more confidence. Confidence is what supports the maximum multiple. The buyer is not paying for the trailing revenue. The buyer is paying for the future revenue they can rely on. Contracted future revenue is the most reliable signal a seller can produce.
The math is real. A business with $5 million in annual revenue but only month-to-month contracts is fundamentally different from a business with $5 million in annual revenue and 80 percent of that under three-year contracts. The first business carries renewal risk on every customer every month. The second business carries renewal risk only on customers whose contracts come up in the next twelve months. Buyers pay materially different multiples for the two profiles. The SCORE framework covers how revenue quality factors into the diagnostic.
Combine Contracts With Recurring Revenue For Maximum Effect
Contracted revenue is one half of the proof. Recurring revenue is the other half. The combination — multi-year contracts with monthly, quarterly, or yearly recurring billing — produces the strongest possible signal to a buyer. Together they say: this customer is committed for years, and the customer is paying on a predictable schedule.
The compounding effect on multiple is significant. A business with both signals — long contracts and recurring billing — typically commands a premium of 1x to 3x EBITDA over a comparable business with neither. On a $2 million EBITDA business that is $2 million to $6 million in enterprise value at exit. The work to install both signals starts 36 months out. For the broader treatment on recurring revenue construction, see the recurring revenue framework discussion inside the SCORE assessment.
The Pricing Lever — Discount For Longer Terms
One of the cleanest ways to migrate customers to longer contracts is pricing. Customers who sign longer contracts get a different price than customers who sign shorter contracts. The discount can be 5 to 15 percent depending on industry and customer profile. The trade is straightforward — the customer gets a lower per-period rate, and you get the predictability and contracted revenue that supports a higher multiple at exit.
Even customers who decline the longer-term option produce useful information. They tell you which accounts are short-term tactical and which accounts are long-term strategic. The strategic accounts that accept multi-year terms become the proof points in your diligence binder. The tactical accounts that decline get repositioned in your customer base over the 36-month window. The Foundational Four documentation makes this customer segmentation work visible and defensible during diligence.
What Happens If You Do Not Fix Contracts Before Sale
If you go to market with contracts that are not assignable and not multi-year, three things happen. First, the multiple compresses because the buyer prices renewal risk into the offer. Second, the close timeline extends because every non-assignable contract requires customer consent before transfer — which means weeks or months of customer outreach during the diligence window. Third, some deals die at the diligence table because the contract book reveals that the revenue the buyer thought they were acquiring is less secure than the financials suggested.
None of these outcomes are recoverable in the final months before sale. Contract repairs take 24 to 36 months because they require customer cooperation through normal renewal cycles. Owners who try to fix this in the final year typically produce a mixed contract book that buyers spot during diligence and price accordingly. Start the contract work three years before you plan to sell, work with legal counsel privately, and arrive at the closing table with a clean book.
Frequently Asked Questions
Why do I need to look at my contracts 36 months before selling my business?
You need 36 months because contract renewal cycles take that long to refresh the entire contract book under new assignable language. Most contracts are one-year or two-year terms, and you can only update the language during renewal without renegotiating in the middle. Compressing this work into a shorter window produces a mixed contract book that buyers spot during diligence and price as risk.
What does contract assignability mean in a business sale?
Contract assignability means the contract can be transferred to a new owner without the customer’s separate consent. Most contracts that were not drafted for an eventual sale are not assignable. When a buyer reviews the contracts during diligence, non-assignable contracts mean every customer has to consent to the transfer separately — creating delay, risk, and friction that compresses the multiple.
Which contract provisions do I need to update before sale?
Update four provisions at minimum. The assignability clause permitting transfer to a successor entity without customer consent. The change-of-control clause defining what happens to the contract during sale or restructuring. The term length and renewal mechanics including notice periods and termination triggers. The damages and liability provisions that protect both old and new ownership during and after transfer.
Do I need a specialized M&A attorney to update my contracts?
Yes. General business attorneys typically write contracts for day-to-day operations, not for an eventual transaction. An M&A attorney who has reviewed dozens of transaction contracts understands which provisions matter at the closing table. The cost is typically three to ten thousand dollars for a complete contract template refresh. The return at exit dwarfs the legal investment.
Should I tell my sales team why we are updating contracts?
No. The contract work happens in private conversations with legal counsel. You do not announce a project name or signal that the business is preparing for sale. Premature disclosure creates retention risk and competitive exposure if word leaks. Update the template and roll it out as standard practice for new deals and renewals. The team will absorb the new language over time without needing to know the strategic reason.
How does multi-year contract revenue affect my exit multiple?
Multi-year contract revenue supports a higher multiple because buyers underwrite acquisitions based on the revenue they can rely on after close. A business with 80 percent of revenue under three-year contracts is fundamentally different from a business with month-to-month contracts at the same revenue level. The contracted profile typically commands 1x to 3x EBITDA premium over the uncontracted profile.
How do I migrate existing customers to longer contracts?
Use pricing as the lever. Customers who sign longer contracts get a 5 to 15 percent discount compared to shorter contracts. The trade is straightforward — the customer gets a lower per-period rate, and you get predictability and contracted revenue. Customers who decline the longer-term option tell you which accounts are tactical versus strategic, which is useful segmentation information regardless of sale timing.
What is the difference between contract revenue and recurring revenue?
Contract revenue means the customer is legally committed to pay for a defined period. Recurring revenue means the customer pays on a predictable schedule — monthly, quarterly, or annually. The combination of both produces the strongest signal to buyers. A multi-year contract with monthly recurring billing tells the buyer the customer is committed for years and paying predictably throughout.
What happens during due diligence if my contracts are not assignable?
Three things happen. The buyer prices renewal risk into the offer, compressing the multiple. The close timeline extends because every non-assignable contract requires customer consent before transfer. Some deals die at the diligence table because the contract book reveals revenue uncertainty the financials did not show. None of these outcomes are recoverable in the final months before sale.
Can I fix non-assignable contracts in the final year before sale?
Not effectively. Contract repairs require customer cooperation through normal renewal cycles, which takes 24 to 36 months for most contract books. Owners who try to compress this work into the final year produce a mixed contract book — some assignable, some not — that buyers spot during diligence and price accordingly. Start three years before you plan to sell.
Full Transcript
One of the things that most people do not think about when they go to sell their business is the current contracts that they have, and whether they are assignable or if they are enforceable. This is a good place for you to start five years, four years, three years, two years in advance before you sell your business. It gives your sales team the ability to make changes they need to close deals. I am Scott Sylvan Bell, coming to you live from Bora Bora, on a perfect day to talk about business, business exits, contracts, and a fantastic day to talk about you.
If you are on the path that you are saying you want to sell your business in five years, four years, three years, two years, you want to give yourself the absolute best advantage to get the maximum multiple. Part of that starts with how are your deals closed. Right now today, if you are three years out and your contracts are not assignable — meaning they cannot be transferred to somebody else — then one of the things that you could take a look at is having a conversation with an attorney, legal, and saying, hey, how do we make it so that our contracts from here on out, if we choose to sell, make it through the scrutiny process of due diligence.
You do not have to announce this to the team. This is just something that you would sit down with legal counsel and say, hey, in a private conversation, this is what I am considering doing. Then they are going to say, hey, we are going to strengthen these three or four things, we are going to make these modifications, and it is going to work to your advantage.
Now, if you have a sales team, sometimes people get weirded out and hooked out about changes made. It gives them time to get their confidence back, to get back onto the process, to go close deals. And if you are five years, four years, three years out, if there is a road bump, if there is a snag, if there is a challenge with what is going on, you have got time to fix that. You have got the opportunity to make the changes that you need.
Here is the other thing. When it comes to you going to sell your business, if you can prove that you have business under contract for two, three, or four years, it allows for you to shoot for that maximum multiple. It does not necessarily mean that you are going to get it, but the buyer is going to take a look and say, okay, we have got money under contract, we know that money is coming in on day number one. If you can combine this with monthly recurring revenue, quarterly recurring revenue, or yearly recurring revenue to prove that you have money coming in, it is just a big value to you.
So here is my challenge for you today — take a look at your contracts and see how long they are enforceable. Are they month to month? Are they year to year? Are they every two years? One of the things that you can do is you can change your pricing. Somebody who signs up for a longer contract may get a different type of discount than somebody who gets a shorter contract. The benefit for you in the long run is greater because even if you do not sell, you know that you have revenue coming in. Taking a look at those contracts is of great benefit to you. I would just say it is your role and responsibility to go get some legal counsel.
Hey Scott, what does Bora Bora look like on a day where it was raining and it is not raining anymore, but slightly windy? Looks like that.
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