In the eyes of a buyer, there are two types of revenue: Contracted and Non-Contracted.
- Contracted Revenue: Guaranteed by a written agreement (e.g., a Master Service Agreement or Subscription).
- Non-Contracted Revenue: Transactional. Based on habit or personal relationship.
The Buyer’s Math
If you have $1 Million in EBITDA, but it’s all based on handshake deals, a buyer might pay a 3x multiple ($3M).
If you have that same $1 Million in EBITDA, but 80% of it is locked in with recurring annual contracts, a buyer might pay a 5x multiple ($5M).
That piece of paper is worth $2 Million.
The “Handshake” Trap
Many sellers are afraid to ask their long-term clients to sign a contract. They fear it will insult the relationship.
However, a buyer views “Handshake Revenue” as 100% At-Risk. They worry that your clients are loyal to you, not the company. When you sell, the “glue” holding the client to the business dissolves.
The Strategy: The “MSA” Rollout
You don’t need to lock everyone into 5-year deals tomorrow. But you should start implementing Master Service Agreements (MSAs).
An MSA doesn’t necessarily force them to buy; it simply establishes the legal terms of the relationship (payment terms, liability, IP).
- Why this helps: It proves to a buyer that the customer is a corporate account, not just a personal friend. It shows that the relationship has been formalized and transferred to paper.
Buyers pay for certainty. A handshake is a variable; a contract is a constant. If you want a premium price, put it in writing.