Sellers of middle market Aerospace and Defense companies encounter the topic of “Material Contracts” near the end of the sale process when the formal Purchase Agreement for a company is being negotiated. A material contract is one that represents a significant portion of annual cost or revenue.
The M&A attorneys on both the seller and buyer side need to agree on what constitutes “materiality.” That is, what size contract is material to the business. Typical materiality tests in the middle market of aerospace and defense are often defined as those above a specific threshold, for example ‘all contracts that are expected to be greater than $250,000 annually’.
Because the buyers will heavily review all Material Contracts, it is critical that sellers be well prepared and have excellent contracts administration in regard to these documents. They must be complete (with no pages missing), fully executed (with no signatures missing), and current (with all required renewals). Furthermore, the parties to the contracts must follow the agreements’ terms. If the parties have informally agreed to modified terms (such as payment terms) those informal agreements must be formally amended.
As we say in many of our Deal Notes®, preparation is the key to a successful sale of a middle market aerospace and defense company. Material Contracts are just another example of where preparation is important.
Have a great day everyone.
Managing Director, Defense