Contract Diligence Checklist for PE Investment in Technology Companies

For a private equity investor, a technology company's contracts often explain the quality of earnings more clearly than a revenue spreadsheet. Customer terms determine retention and pricing power; vendor and licence terms determine service continuity and margin risk; IP and liability clauses determine exposure after acquisition. Contract diligence should establish whether the operating model can deliver the value assumed in the investment case.

Why This Matters

Contract risk tends to surface at precisely the wrong time: a key enterprise customer can terminate after a change of control; revenue depends on renewal concessions not reflected in forecasts; a technology supplier can withdraw a critical licence; liability caps are uneven across the customer base; or a target has promised broad IP indemnities without matching upstream protection.

The investor does not need every agreement read with equal intensity. It needs a risk-based review that identifies the contracts driving revenue, technology delivery, exclusivity, integration and downside exposure. The official statutory foundation includes the Indian Contract Act, 1872, which includes rules concerning enforceable agreements, performance, novation and alteration of contracts under section 62, and compensation for breach.

What Counsel Should Review

Begin by constructing a contract universe. Request customer and vendor registers, standard templates, negotiated deviations, side letters, disputes and waivers. Select material agreements using recurring revenue, customer concentration, strategic dependency, unusual exposure, acquisition relevance and known disputes rather than value alone.

For customer contracts, review term, renewal, termination, price changes, minimum commitments, credits, service levels, acceptance, warranties, IP indemnities, liability caps, exclusivity, audit rights, assignment and change-of-control provisions. Compare contracted terms against management's revenue and churn assumptions. A multi-year headline contract may be less valuable if termination rights are broad or price protection is weak.

For vendors and technology dependencies, determine whether the target can continue to operate and integrate after closing. Review cloud, infrastructure, software, reseller, distribution, implementation and managed-services arrangements. Focus on licences, service continuity, substitution rights, subcontracting, source-code access where material, escalation obligations, liability allocations and any consent needed for the transaction.

For integration, identify contracts requiring assignment, notice, consent or novation. Section 62 of the Indian Contract Act expressly addresses the effect of novation, rescission and alteration of contract; the deal team should not assume that operational integration automatically moves contractual rights and obligations to the intended post-closing structure.

Translate the results into investment action. The diligence report should identify consent conditions, closing deliverables, specific indemnities, retention or pricing concerns, remediation owners and post-closing contract-management priorities. That is more useful to an investment committee than a generic summary that agreements are "generally in order."

Further transaction-facing legal support is described in KAS & Co.'s services and Insights.

Relevant Judicial Guidance

In Nabha Power Limited & Anr. v. Punjab State Power Corporation Limited & Anr., 2024 INSC 833, judgment dated 5 November 2024, the Supreme Court considered express contractual terms in a power purchase context. At paragraph 41 of the official judgment, the Court stated that contractual words are generally construed in their grammatical and ordinary sense, and that business efficacy cannot contradict an express term.

For a PE review, the point is practical rather than sector-specific: value assumptions should be tested against the written allocation of risk. A buyer should not expect a favourable commercial result to be implied over an express termination, pricing, consent, liability or change-of-control term.

Typical Timeline and Cost Range

A red-flag review of a well-organised technology company's top customer and vendor contracts can often be completed in 2 to 3 weeks after a complete contract register and document set are provided. A platform with extensive negotiated enterprise terms, partner channels, multinational dependencies or missing records may need a longer phased exercise.

An efficient fee scope typically begins with materiality criteria and red flags, then expands only for contracts that affect valuation, financing conditions, consents or the post-closing operating plan.

Common Mistakes

1. Reviewing only contract value and missing termination or consent rights. Revenue concentration analysis must be connected to the terms that can change it.
2. Assuming business expectations override express drafting. Investment underwriting should follow the written allocation of risk.
3. Leaving integration steps for after completion. Assignment, consent and novation requirements should be identified before the buyer commits to its operating model.

How KAS & Co. Can Help

KAS & Co. supports PE firms and technology businesses with material-contract diligence, risk allocation, consent strategy and contract-management priorities linked to a transaction thesis. To discuss a technology investment review, contact KAS & Co..

FAQs

1. How should a PE investor choose which contracts to review?

Use financial and operational materiality together: major recurring-revenue agreements, concentrated customers, key technology vendors, non-standard liability positions and agreements affecting acquisition or integration.

2. Are change-of-control and assignment clauses the same issue?

No. A contract may address one, both or neither, and their effect depends on drafting and transaction structure. Each material contract should be checked individually.

3. Why review vendor contracts when acquiring a SaaS company?

Vendor and licence arrangements may control availability, product functionality, cost, substitution rights, indemnity support and the ability to deliver customer promises after closing.

4. Can contract issues be dealt with only through warranties?

Warranties help allocate risk, but they do not necessarily preserve a customer, obtain a consent or secure an operationally essential licence. Material issues often require direct remediation or closing conditions.

Sources

• The Indian Contract Act, 1872 - India Code
• Nabha Power Limited v. Punjab State Power Corporation Limited - Supreme Court judgment dated 5 November 2024