We do most of our business on handshake agreements or auto-renewing purchase orders rather than multi-year master service agreements. How will buyers view this contract risk, and how do we fix it before going to market?

Question

Tyler Smith · Accepted Answer

Handshake agreements and informal purchase orders are fatal to high valuation multiples. To you, a handshake represents years of mutual trust and goodwill with long-standing customers. To an institutional buyer, a handshake represents zero guaranteed revenue, an unhedged customer flight risk, and an asset that cannot be legally transferred or leveraged by lenders.

Private equity acquirers and banks underwrite acquisitions based on recurring, predictable cash flow. When revenue rests on informal understandings, buyers apply heavy risk discounts, demand massive earnouts, or require substantial escrow holdbacks to guarantee customer retention post-closing.

Remediating this contract risk requires a disciplined, multi-quarter effort along your exit runway:

- Audit your customer base. Identify the accounts that generate the top eighty percent of your revenue and gross profit. Review their existing documentation, noting which relationships lack signed master service agreements or contain non-assignment clauses that require customer consent upon a sale.
- Standardize terms. Create a modern Master Services Agreement (MSA) with your legal counsel that includes clear statements of work, formal payment terms, standard liability caps, and clear change-of-control assignment language.
- Roll out agreements methodically. Do not send sudden legal contracts out of nowhere, which alarms clients. Instead, align the contract rollout with natural operational events, such as annual price updates, scope expansions, service renewals, or quarterly business reviews. Emphasize that formalization protects service level commitments for both parties.

Securing signed, assignable agreements removes commercial diligence roadblocks, proves revenue durability, and ensures the buyer pays full market value for your customer relationships at closing.