Question:

The business I am interested in has no contracts in place, and the seller is not willing to ask the customers to enter one before selling. How secure is this and what can I do to protect myself?

Answer:

Great question.

Unfortunately, the vast majority of businesses you will review will have the exact same predicament.

Even ones with contracts will generally be pretty loose and easy for the clients to cancel. While there are some businesses where contracts are the norm, and there are penalties involved for cancellation, these are usually ones with ongoing maintenance or service or in high priced manufactured products.

As far as the seller not wanting to contact the customers this is certainly understandable from their point of view.

The last thing they want is word getting out that the business is for sale. If there are no major customer concentration issues, this is not a big problem BUT, if only a few clients represent the bulk of the business then you may want to consider the following:

Add a contingency in the contract whereby you can interact with the client and the seller but only after you have signed off on all other contract conditions;

Or, include an earnout where part of the purchase price is contingent on you maintaining the customer for 12 months or so after you acquire the business.