Most of our client work is governed by handshake agreements and annual purchase orders rather than long-term contracts. How significantly does this impact enterprise value during due diligence, and what is the sequence to formalize them?

Question

Tyler Smith · Accepted Answer

Operating on handshake agreements or short-term purchase orders introduces severe valuation discounts. To an institutional buyer, an informal relationship means your entire customer base can evaporate the morning after ownership transfers. Buyers price that risk by reducing your valuation multiple or restructuring the purchase price into a lengthy earnout.

Formalizing client contracts must be handled systematically across a two-year exit runway without alarming your customer base.

- Tier your accounts: Review your customer list and identify the accounts that generate the top eighty percent of your revenue. Do not attempt to formalize every tiny customer at once.
- Frame the transition as an operational upgrade: Communicate to clients that updated Master Services Agreements (MSAs) and Statements of Work (SOWs) are required for regulatory compliance, data security, and capacity planning. Give them guaranteed service level commitments in exchange for formal terms.
- Include transferability clauses: Ensure every contract includes an assignment clause specifying that the contract survives an equity sale, merger, or change of control without requiring customer consent.
- Lock in multi-year duration: Shift the highest-volume customers to twelve, twenty-four, or thirty-six month agreements with clear termination notice windows.

When a buyer enters diligence and sees eighty percent of historical revenue backed by assignable, multi-year contracts, relationship risk transforms into defensible enterprise value.