In M&A or majority control transactions, deferred revenue of SaaS companies can become a highly negotiated item if the amounts are significant. Deferred revenue is a liability that accrues when a SaaS business gets paid by customers in advance for future product subscriptions. In cash-free debt-free deals, differences in views of the buyer and seller can stem from the fact that the seller has already received cash from customers for obligations that the buyer will have to fulfill post transaction. To the extent that deferred revenue is not included in Net Working Capital, it could lead to a downward adjustment in Purchase Price.
Allied Advisers is publishing this update to our prior Net Working Capital article to explain the nuances of deferred revenue and its impact on the purchase price in M&A deals. An understanding of the concepts will help founders and CEO’s navigate thoughtfully through deferred revenue discussions in transactions.
