Our buyer is classifying our multi-year managed service agreements as re-occurring instead of true recurring revenue because we do not have hard termination penalties. How do we prove the lock-in value of our customer base to secure a software-like valuation multiple?

Question

Tyler Smith · Accepted Answer

Buyers will look for any excuse to reclassify your recurring revenue as transactional or re-occurring to justify a lower multiple. To defend your contract portfolio, you must show them operational data that proves your customer behavior matches true recurring characteristics. Do not rely solely on the legal language of the agreements.

Use your EOS® Scorecard historical data to show a multi-year trend of customer lifetime value and an exceptionally low churn rate. You need to demonstrate that your customer onboarding and service delivery are highly systemized. When your core customer success processes are documented and followed by all, it proves that client retention is a function of your operational superstructure, not lucky relationships.

Additionally, present your V/TO® three-year picture to show how your recurring revenue model is built into your long-term growth engine. If you can show that ninety percent of your revenue at the start of each fiscal year is already contracted and that your client retention rate has consistently remained above ninety-five percent over three years, you nullify the buyer's argument. Your recommendation is to package this performance history directly alongside your contracts in the due diligence room, proving that the lack of termination penalties has zero impact on client longevity.