Looking for advice on business with large amount of deferred revenue

May 24, 2018

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, United States

The deferred revenue is a result of customers prepaying for the service. I've begun LOI negotiations on the business and I'm looking to better understand the implications of the various options for treating the deferred revenue at close and in the working capital calculation. If there is anyone out there with transaction experience on this kind of business, I would really appreciate the opportunity to talk through the situation in more detail. Thanks in advance.

Reply by an intermediary
from Indian Institute of Technology, Bombay in New York, NY, USA

Hi Ryan, Prepayment of the services means that you have the responsibility of delivering the services after you purchase the business. So the revenue for the rest of the service period should come to you and can be adjusted in the price or at closing - the same way that you adjust for the prepaid expenses that the seller might have paid - such as prepaid rent or taxes. Interesting article on how these prepaid expenses and prepaid revenue should be treated in the balance sheet: http://smallbusiness.chron.com/prepaid-expenses-prepaid-revenues-reported-balance-sheet###-###-#### html

Reply by a searcher
from Harvard University in Los Angeles, CA, USA

Hi Ryan- I've a few lessons on deferred revenue and how to treat it. Happy to compare notes. redacted

+2 more replies.

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