Our recurring revenue is highly stable but relies on annual renewals without auto-renew clauses. How do we prevent the buyer from discounting our multiple during due diligence?

Question

Tyler Smith · Accepted Answer

Buyers look past the label of recurring revenue to analyze the actual retention behavior of your customer base. If your contracts lack auto-renewal clauses, a sophisticated buyer will view this as re-occurring revenue rather than true recurring revenue, using the lack of legal lock-in to discount your multiple.

To protect your valuation, you must present undeniable empirical evidence of customer lifetime value and retention metrics. Start by pulling five years of historical data to calculate your logo retention and net revenue retention. If your net revenue retention is over one hundred percent, it proves that even without automatic renewals, your customers actively choose to spend more with you year after year.

Next, leverage your EOS framework to show how you manage the client relationship. Show the buyer how you use customer feedback loop processes within your weekly Level 10 Meeting to identify and resolve account issues before they lead to churn. This demonstrates that your high retention is the result of a repeatable system, not luck.

Finally, if the buyer still insists on a discount, propose a structured solution in the letter of intent. Offer to convert a portion of the purchase price into a short term seller note that amortizes based on actual contract renewals over the first twelve months post-close. This bridges the valuation gap by keeping the purchase price high while offering the buyer a safety net for any unexpected customer departures.