Newest Sign of Corporate Distress: Selling Customer Contracts

In an attempt to squeeze some cash out of their assets, a few distressed companies are putting their customer contracts on the selling block. Warren Haber, Managing Director at Crossbar Capital said, “With capital for traditional corporate financing extremely scarce, some companies are looking to monetize their customer contracts. These companies intend to use the proceeds to fund other operations or to return capital to investors before liquidating.”

However, selling customer contracts won’t be a slam dunk. According to Charles McCormick, a partner with the law firm of McCormick & O’Brien LLP, “Many contracts contain unequivocal non-assignability clauses while many states have laws on their books that require customer consent in order to assign contracts.” Often customers originally chose the distressed company over the potential assignee and would object to receiving services from the potential assignee.

Despite customer objections to having their vendor contracts transferred to another service provider, many customers may not have much of a choice. A service provider that liquidates can’t fulfill its obligations and dealing with vendors in bankruptcy presents their own set of messy entanglements.

David Wanetick is a Managing Director at IncreMental Advantage, a research and valuation firm based in Princeton, NJ. He is an instructor at The Business Development Academy. His most recent book is The Power of Incremental Advantage: How Incremental Improvements Produce Dramatically Disproportionate Results.