Valuing Future Contracts in Search Deals

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August 02, 2024

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

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
from University of Maryland at College Park in Havre De Grace, MD 21078, USA
The seller is going to want to assign a value to these but the value depends mostly on the bookkeeping for business purposes. Is the contract for a future sale or is it a enforceable contract for goods sold? How enforceable is that contract? Is there a cancel provision if leadership or ownership changes? Putting aside GAPP accounting, remember that a contract with a customer to sell items is not the same as a purchase contract with guaranteed minimums.
With all of those ideas in mind - as Scott stated above - this is a perfect opportunity to mitigate risk but have a seller win if you base the compensation on profit share or earn out, etc... With that said, keep in mind there will be times when you don't want to perform on a contract above any requirements on purpose like when the pricing in a contract is not sustainable due to changes to costs inputs. That will put you at odds with the seller and when the numbers are low they might want to reach out to their old customer and ask them why they aren't ordering.
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Reply by a professional
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. https://www.teeupnextgen.com/eta
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