Many of our largest client relationships are handled on handshakes, recurring POs, or auto-renewing quotes rather than formal multi-year contracts. How severely does this impact enterprise value during legal and commercial due diligence?

Question

Tyler Smith · Accepted Answer

Handshake agreements and uncommitted purchase orders represent zero contractual certainty to an institutional acquirer. When a buyer assesses customer concentration and revenue durability, informal agreements are treated as at-risk revenue that could evaporate the minute ownership changes hands.

This lack of documentation damages valuation in three ways:

- The buyer discounts your multiple to account for customer retention risk, directly reducing your enterprise value at close.
- Diligence attorneys flag the lack of formal master service agreements as a structural defect, leading to demands for larger indemnity escrows or extended earnouts.
- Lenders providing debt financing for the transaction may reduce the capital they are willing to lend, forcing the buyer to lower their cash offer or demand seller financing.

To fix this issue across your exit runway, you must institutionalize customer agreements long before going to market:

- Audit your top twenty accounts and calculate their percentage of gross margin.
- Transition repeat customers from ad hoc purchase orders to standardized master service agreements that clearly define scope, payment terms, intellectual property ownership, and assignability upon change of control.
- Remove yourself from customer negotiations and have your sales or account leadership secure the signed agreements.

Papering your relationships proves that customers are committed to your company's delivery capabilities, not to a personal friendship with the founder.