We have a hybrid model with auto-renewing annual subscriptions, but our contracts allow clients to opt out with sixty days notice if we fail to meet service levels. The buyer is discounting our recurring revenue because of this SLA out-clause. How do we use historical churn data under IVS 105 to prove these are sticky assets?

Question

Tyler Smith · Accepted Answer

The buyer is using the sixty day termination clause as a negotiating tactic to price your recurring revenue at a lower transactional multiple. To defeat this argument, you must separate the legal terms of your contracts from the actual behavior of your customers. Under IVS 105, the valuation of an asset should reflect how market participants actually behave. If your historical data shows that customers stay with you for years despite having a short term termination right, you have true recurring revenue. Compile a cohort analysis showing your customer retention rates over the last five years. If your annual logo retention is above ninety percent and your net revenue retention is over one hundred percent, the SLA out clause is practically irrelevant to your business value. Present this data to the buyer as proof of customer stickiness. Explain that the sixty day notice period is an industry standard service level agreement, not a sign of customer volatility. If the buyer remains stubborn, suggest a structure where a small portion of the purchase price is held in escrow for twelve months. This escrow is released based on the actual retention of your existing client base post close. This protects your valuation while proving to the buyer that your recurring revenue is built on solid ground.