The buyer is offering a high valuation multiple based on our recurring revenue, but they want to write a representation and warranty clause that penalizes us if we lose any recurring clients before closing. How do we structure this clause to protect our valuation from normal, predictable customer churn?

Question

Tyler Smith · Accepted Answer

Buyers love recurring revenue because of its predictability, but they will try to use standard customer attrition as a wedge to lower the purchase price right before closing. You must resist any clause that triggers an automatic dollar-for-dollar valuation reduction for any client loss during the transition period. Instead, negotiate a churn threshold or basket in your purchase agreement. This clause should state that no purchase price adjustment will occur unless your total recurring revenue drops by more than a specific percentage, such as five percent, between the signing of the letter of intent and the closing date. This accommodates normal, expected customer turnover. You should also present your historical customer retention metrics from your EOS Scorecard. Show the buyer that your net revenue retention is consistently over one hundred percent because your remaining customers expand their contracts, which offsets any minor churn. Additionally, ensure that your customer onboarding and retention processes are fully institutionalized within your Accountability Chart. If the customer success seat is clearly defined and operating independently of the owner, the buyer will have less concern about post-sale retention. By establishing a reasonable variance buffer and proving your systems maintain client health, you protect your premium recurring revenue multiple from being chipped away by routine operational noise.