Accounting for unredeemed Gift Cards as Liability?

September 13, 2024

by a searcher from Babson College - F.W. Olin Graduate School in Boston, MA, USA

I'm under LOI for a small medspa that has significant balance on the unredeemed gifts cards as liability. Some date as far back as 5-6 years. How have others structured this into the APA?

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Reply by a professional
from University of Pennsylvania in San Francisco, CA, USA

^redacted‌ thanks for the tag. ^redacted‌ typically we see the parties agree to value the gift cards at cost not face value. Then, if you build in some sort of historical redemption percentage for different aging bands as noted by ^redacted‌, you could debit that against the purchase price as a customer prepaid / unearned revenue. Sellers tend to go for this if the gift cards are of a manageable value.

If the value is high and/or redemption dubious (as for old outstanding cards), often you see the gift cards credited to buyer at cost as redeemed for###-###-#### months post-closing (ie, there's a cut off), and offset against an escrow, note, and/or earnout.

We once did a deal where the gift cards were actually notes in patient charts ("Sally due for free botox" etc.) and the owners had no way to actually come up with a value beyond reviewing all charts, which wasn't feasible, but guessed around $400k. Many were aged. In that situation, we took the "as redeemed" approach described above.

Reply by a searcher
from Babson College in Boston, MA, USA

Thanks all for a great discussion on this. It is an asset sale, and the amount is too high but the sellers think majority of them will not be redeemed because they’re 4+ years old. Regardless, it is a liability for the new owners because we will always honor the gift cards because they have no expiration date. I like both suggestions above to value them at cost of providing services and not face value, and use a phased approach for putting a value 100% of GC purchased in the last X months, 50% for Y months, and maybe an even lesser percentage for ones that are Z+ years old. Grateful for this community to chime in and provide different perspectives on this question. Thanks ^redacted‌

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