The buyer is discounting our recurring maintenance revenue multiple because they claim our service level agreements create uncapped liability. How do we structure the purchase agreement or renegotiate these contracts to protect our recurring revenue multiple?

Question

Tyler Smith · Accepted Answer

Service level agreements with uncapped liability are a major red flag for buy-side legal teams, and they will use them to heavily discount the multiple on your recurring revenue. To protect your valuation, you must address this liability risk structurally rather than allowing the buyer to apply a blanket discount to your contract values.

First, look at your historical performance data. Use your operational tracking systems to prove that you have never breached a service level agreement or triggered a liability penalty in the history of the company. This empirical track record proves that the practical risk is near zero, regardless of the contract language.

Second, negotiate specific indemnification limits in the definitive purchase agreement. You can structure a specific cap on liabilities related to historical customer contracts, or purchase commercial general liability insurance that specifically covers these operational risks.

If necessary, use the pre-closing transition period to renegotiate the liability terms with your top customers. Many clients are willing to amend their contracts to include a reasonable cap on liability, such as twelve months of fees, in exchange for a minor service upgrade or an extension of their contract term. By actively managing these contract risks and resolving them before closing, you remove the buyer's leverage and preserve the premium multiple your recurring revenue deserves.