Most of our revenue comes from repeated handshake project work rather than signed long-term contracts. Why does this kill our exit valuation, and how do we convert clients to formal agreements ahead of a sale?

Question

Tyler Smith · Accepted Answer

Handshake agreements and project-based purchase orders feel fine when you run a lifestyle business. You trust your clients, they pay their invoices, and business recurs organically. However, an institutional buyer views undocumented project revenue as volatile and uncommitted.

Without formal, binding agreements, a buyer has no guarantee that your revenue will exist thirty days after the closing wire clears. They will treat your business as transactional rather than recurring, which cuts your valuation multiple in half and invites heavy earnout structures. Buyers pay top dollar for contracted, predictable cash flow.

To fix this during your exit runway, you must institutionalize your client relationships through transferable contracts. Focus your efforts on three specific contractual upgrades:

- Master Service Agreements: Convert one-off project estimates into formal Master Service Agreements that define governance, payment terms, and scopes of work across all future projects.
- Multi-year terms with auto-renewals: Shift key accounts from annual re-bidding to two or three-year agreements that automatically renew unless thirty or sixty days notice is provided.
- Clean assignment clauses: Ensure every contract includes an assignment provision stating the agreement remains fully valid upon a change of control or sale of company assets, without requiring prior written customer consent.

Use your quarterly Rocks to systematically convert your top twenty percent of accounts first, as they typically represent eighty percent of your revenue. When your revenue is secured by legally enforceable, transferable contracts, buyers can easily model future earnings, leading to higher valuations, cleaner offers, and faster closings.