IS IT A PROBLEM IF ALL MY CLIENTS ARE NOT CONTRACTED?
Businesses with long term recurring contracts are always valued higher than those with short term or no contracts. This is due to the risk profile that a buyer will need to access when reviewing the base of the business. As most businesses are fundamentally purchased for its customers and contracts, then it’s no surprise that heavy scrutiny is placed on this aspect of the business.
Initially, the purchaser, as part of the due diligence process, may request copies of all contracts with the seller’s customers. The purchaser will want to see whether those contracts can be assigned, meaning transferred, over to the purchaser at closing. Although some business owners assume the contracts automatically “go with the business,” in reality, legal documentation is generally required to assign the contracts. Additionally, the purchaser will want to examine the contractual agreements to ensure that the purchaser wants those contracts to be assigned. It may be that the contracts are not well written, or are not feasible from a business perspective.
The purchaser may also ask the seller for a list of the top customers for a recent period, such as the previous fiscal year. The list might include the total amount of revenue received from each customer and the customer’s contact information. And, to be cautious, a purchaser may also ask for a description of all customer complaints about a specified period.
Your business is of value not just by its current sustained flow of cash but also its projection to do so for a long while. A business buyer will be highly interested in a company if the cash flow is not only sustainable but also encouraging, which is also an indicator that determines the value of any business.
For instance, very few business buyers will be interested in a business where earnings seem to come from a small segment of the company, a very few numbers of clients or if the company lacks long-term customers and contracts. Essentially, if these are lacking then the value of the business will appear weaker and selling might not get you much.
The diversity of your customer base is also key. If a large portion of your revenue depends on a small number of clients, it can present more risk for a buyer and affect the value of your company.
Overall, making sure you have solid, long-term contracts with customers and providing access to customers and contracts to a buyer can all have bearings on valuation and increase the overall price you will get, or prevent the buyer finding reasons to chip the price.
Need more information about selling your business? Venture Corporate Finance is a middle-market M&A advisory firm for clients planning to sell their businesses, raise capital, restructure, or grow with acquisitions. We provide independent advice and bespoke transaction solutions to meet their specific objectives.
For more information on corporate finance and M&A services, contact Venture Corporate Finance.