Valuing Future Contracts in Search Deals

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by a searcher from Carnegie Mellon University
in Atlanta, GA, USA

1yr ago

Valuing Future Contracts in Search Deals

Hi Everyone - I have run into some deals where the existing owners have future contracts to be completed post-acquisition. I was wondering how other searchers have gone about valuing those into their deals, if at all. On one hand, the owners got those contracts but on the other hand, you'll have to complete the work post-acquisition.

I have had some thoughts of my own on how to structure a deal with these but wondered if others have had any thoughts or gone through this in their acquisitions.

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reply by a searcher 1yr ago
from University of Maryland at College Park in Havre De Grace, MD 21078, USA

One thought I forgot to mention - when you are pricing that earnout or profit share - think about what you would pay a sales person who brought you that same signed contract with those same terms. Unless there is some outlier for adjusting that cost, remember all factors of a sales team like bonuses, etc... and price that cost.

reply by a professional 1yr ago
from University of California, Berkeley in Sacramento, CA, USA

Hi Tyler, i'm not sure if I fully understand the question. Are you saying
a) these are future-dated contracts, and customers haven't prepaid? If so.. that's just... kinda part of the business. This represents sales pipeline. All businesses that are active and running have a pipeline of contracts. The value of those contracts IS... the business! The contracts still need to be serviced, paid for, collected etc.
b) are these contracts pre-paid such that there is a large deferred revenue balance? If so, it's a bit nuanced because the seller has already received cash for these contracts.

I've seen quite a few of both examples when I was running my search. LMK if you want to connect further. redacted