How Mage Caught a Change of Control Clause That Would Have Killed the Deal

A strategic buyer was acquiring a software company in a $120M transaction. The target's largest customer represented 40% of annual revenue. What no one knew was that the customer contract contained a change of control provision that would allow termination within 10 days of closing.

The Situation

The target company provided enterprise software to large financial institutions. Its customer base was concentrated: the top 5 customers represented 75% of revenue, with the largest single customer accounting for 40%.

The buyer, a larger software company seeking to expand into financial services, had completed extensive commercial diligence. The target's customer relationships appeared stable, with the largest customer relationship dating back 8 years and recently renewed for a 5-year term.

The data room contained the master services agreement with the key customer, along with several amendments and statements of work. The contract appeared standard for the industry.

The Discovery

The deal team deployed Mage to extract key provisions from all customer contracts. The analysis focused on:

• Term and renewal provisions
• Change of control clauses
• Assignment restrictions
• Termination rights
• Pricing and rate lock provisions

Within hours, Mage flagged a critical finding: the largest customer contract contained a change of control provision allowing termination with 10 days notice if the target was acquired.

The provision was not in the main MSA. It appeared in Exhibit B to Amendment 3, which had been executed 4 years earlier when the customer negotiated additional security requirements. The language was brief:

"Notwithstanding Section 12.1, in the event of a Change of Control of Provider, Customer may terminate this Agreement upon 10 days written notice."

The provision defined "Change of Control" broadly to include any acquisition of 50% or more of Provider's equity. The buyer's acquisition would unambiguously trigger this right.

Why This Mattered

The math was simple and alarming:

• Target annual revenue: $30M
• Largest customer revenue: $12M (40%)
• Acquisition price: $120M (4x revenue multiple)
• Post-termination value: $72M (4x remaining $18M revenue)

If the customer exercised its termination right post-closing, the buyer would have paid $120M for a company worth $72M. The acquisition economics would collapse.

Worse, the customer might not exercise immediately. The buyer could close, integrate the company, and then face termination when the customer decided to switch providers or renegotiate from a position of strength.

The Response

The discovery came 3 weeks before the planned signing date. The deal team moved immediately:

Week 1: Internal Assessment

• Confirmed the provision was legally enforceable
• Assessed likelihood of customer exercise
• Evaluated relationship strength with customer
• Prepared business case for customer consent

Week 2: Customer Engagement

• Buyer's CEO contacted customer directly
• Explained strategic rationale for acquisition
• Committed to service continuity and investment
• Requested formal consent to the transaction

Week 3: Documentation

• Customer agreed to consent in exchange for modest pricing concession
• Consent letter drafted and executed
• Purchase agreement updated to include consent as closing condition

The Resolution

The customer ultimately granted consent. The key factors:

1. Relationship strength: The target had served the customer well for 8 years with no significant issues
2. Strategic alignment: The buyer's investment in the platform would benefit the customer
3. Economic incentive: A modest pricing concession made consent attractive
4. Timeline: 3 weeks provided adequate time for internal customer approvals

The deal closed on schedule with the consent in hand.

What Could Have Gone Wrong

Without Mage's systematic extraction, several failure modes were possible:

Late discovery: Finding the provision during closing condition verification would have forced a crisis. The buyer might have walked, or closed with unresolved risk.

Post-closing exercise: The customer could have waited until after closing to exercise termination, negotiating from maximum leverage when the buyer had already paid.

Missed entirely: In a large data room, a provision buried in an exhibit amendment might never surface. The buyer could have closed without knowing the risk existed.

Key Metrics

| Metric | Value | |--------|-------| | Revenue at risk | $12M (40% of total) | | Time to discover issue | 4 hours | | Time before signing | 3 weeks | | Days to obtain consent | 14 | | Outcome | Deal closed successfully |

Lessons Learned

Exhibits and amendments matter. Critical provisions often appear in contract exhibits, amendments, or side letters rather than the main agreement. Comprehensive review must include all related documents.

Customer concentration amplifies risk. When one customer represents a significant revenue share, any issue with that contract is existential. Concentrated customer relationships require heightened diligence.

Change of control provisions are everywhere. Many contracts contain change of control language in unexpected places. Systematic extraction across all documents is the only way to ensure nothing is missed.

Early discovery enables solutions. With 3 weeks to work, the parties had time to engage the customer, negotiate consent, and close successfully. The same discovery at signing would have been a deal-breaker.