Private equity ownership changes how commercial contracts should be evaluated. Once a company becomes a private equity portfolio company (“PortCo”), contracts may have an outsized impact on: scalability, add-on acquisition strategy, operational flexibility, buyer interest, and enterprise value at exit. In practice, those risks tend to concentrate in a small number of recurring contract provisions. Below are nine contract provisions that deserve close scrutiny for PortCos.

Contract Provisions That Deserve Immediate Attention After a PE Investment

1. Basic Commercial Terms

PortCos are measured on metrics like:

• ARR
• cash flow
• EBITDA
• revenue predictability

Even small changes in pricing structure, payment timing, or contract term length can materially affect those metrics. Sales, legal, and management must be aligned. A “bigger deal” can actually reduce value if structured incorrectly.

2. Most-Favored-Nation (MFN) Pricing

MFN clauses promise a customer they will always receive the lowest price offered to anyone else. These clauses are dangerous because they can:

• break pricing models as volume increases
• create issues during add-on acquisitions
• expose acquirers to downstream pricing risk

PortCos should almost never agree to MFN pricing on customer-side arrangements.

3. Termination for Convenience

Termination for convenience clauses allow customers or vendors to walk away at their discretion. These provisions can:

• impair revenue recognition
• disrupt operations
• reduce contract reliability
• create leverage problems during exit diligence

Contracts that contain a termination for convenience right for the other party will be discounted by buyers, potentially materially reducing enterprise value at exit.

4. Intellectual Property Ownership

PortCos often rely heavily on technology. Common risks include:

• missing employee IP assignment agreements
• contractors retaining intellectual property ownership by default
• defective intellectual property assignment language
• broken “chain of title” issues

Cloud on IP ownership is a common landmine at exit, but including basic IP contract terms in all relevant agreements goes a long way in preventing such issues.

5. In-Bound IP Licenses

PortCos rely on third-party software and technology for core operations and product offerings. In-bound licenses must permit:

• future growth
• add-on acquisitions
• expanded user bases
• potential acquirer use post-closing

PortCos must ensure that the licensed use case and applicable fees for in-bound licenses do not create hurdles to growth.

6. Out-Bound IP Licenses

When PortCos license their own IP to customers:

• overly broad licenses can eliminate future revenue
• derivative rights can enable competitors
• vague use cases create unintended rights

PortCos must ensure that out-bound licenses are not overly broad so as to “leave revenue on the table” or enable competitors.

7. Assignment and Change-of-Control Provisions

At exit, buyers heavily scrutinize anti-assignment clauses, change-of-control clauses, consent requirements, and termination rights triggered by ownership changes.

These provisions can:

• delay transactions
• allow counterparties to hold deals hostage

These provisions are “textbook examples” of contract clauses that will be heavily diligenced by buyers at exit.

8. “Affiliate” Definitions

Many contracts bind not only the PortCo, but also its “Affiliates.” If poorly drafted, that term may unintentionally include:

• other portfolio companies under common ownership
• unrelated businesses owned by the same sponsor
• the sponsor itself

Unintended consequences abound if the PortCo is liable for breach of contract caused by all such entities.

9. Exclusivity

Granting exclusivity in a commercial arrangement may result in more favorable pricing and other terms, but granting exclusivity may impact:

• add-on acquisitions
• create unintentional breaches via Affiliates
• limit the potential buyer pool

Like all commercial terms in the context of a PortCo contract, exclusivity terms need to be analyzed in the context of the future business plans, not just the current state of affairs.

The Takeaway

After a private equity investment, commercial contracts must be reviewed through a new lens. Contracts drafted for founder-owned businesses often contain provisions that are problematic for PortCos. A proactive review can prevent:

• unintended consequences
• lost valuation
• stalled exits
• expensive remediation measures

Please reach out to Koley Jessen’s Commercial and Technology Contracts Practice Group with any questions relating to PortCo commercial agreements.

_{This content is made available for educational purposes only and to give you general information and a general understanding of the law, not to provide specific legal advice. By using this content, you understand there is no attorney-client relationship between you and the publisher. The content should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.}