Contract Considerations for Private Equity-Backed Companies: Aligning Contract Terms With Unique Business Operations

A business may experience significant change when it receives an investment from a private equity firm and it becomes a PortCo. For example, the private equity firm may have a structured plan to implement changes with goals to increase revenue, improve gross margins, reduce overhead, and leverage shared services with other PortCos. As part of the plan, the PortCo's leadership will also want to review the PortCo's customer contracts to ensure they are consistent with the private equity firm's and PortCo's financial objectives and metrics.

A PortCo should rarely, if ever, agree to most favored nation (MFN) pricing terms in a customer contract. Generally, these provisions promise the customer that they will not pay a higher price for goods or services than the lowest price charged to any other customer for the same goods or services. With accelerated organic growth, the PortCo is at greater risk of violating an MFN provision with an additional volume of customer contracts. Also, the PortCo may inadvertently breach an MFN provision if it assumes an add-on acquisition because those contracts may contain lower prices than the PortCo's existing contracts. Finally, at the time of exit, an MFN provision may create concerns for a strategic acquirer with a similar customer base as the PortCo.

Intellectual property rights and licensing are other areas where PortCos need to pay close attention to their rights and obligations. These terms must be analyzed not only from the perspective of the PortCo's current operations but also future operations and the impact on future acquirers. Intellectual property ownership and licensing terms must be narrowly tailored for the specific use case to ensure the PortCo is not "leaving revenue on the table" for future, distinct use cases.

Other contract provisions that must be heavily scrutinized by the PortCo include termination rights, assignment and change of control restrictions, restrictive covenants and exclusivity, and affiliate rights and restrictions. These terms can potentially undermine the value of the commercial contract and place the PortCo at risk for a potential breach based on the PortCo's growth potential and current and future business operations.

Listen as our authoritative panel discusses the unique business characteristics that PortCos need to consider when reviewing commercial contracts. The panel will also provide contract negotiating and drafting tips to employ when representing a PortCo.