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Comments on deferred revenue in sale 
April 22, 2019
Comments on deferred revenue in sale from article on April 16, 2019
            I will be interested to see comments from some of the other knowledgeable people who read your blog, but here is my take:
·        Typically what I see is inspections being billed and collected after they are done,  so I don’t think there should be deferred revenue to worry about there. If there were a large number of inspections billed and collected but not done then maybe some adjustment should be looked at, but I have never seen this happen.
·        Regarding maintenance agreements, again if there were a significant number of agreements billed in advance, all at one time, with lots of work still to be done through the rest of the year, then maybe a deferred revenue adjustment might be considered. Again I have not seen this happen
·        I don’t see how a license renewal can create deferred revenue.
·        In my experience deferred revenue is mainly associated with and taken as a deduction with monitoring revenue. Buyers generally take it off the gross purchase price, not out of the holdback. I have seen circumstances where the buyer will reduce the deferred revenue deduction if the deferred is very large ( i.e. all the accounts are being billed annually). The rationale is the buyer knows it will not cost them the full deferred revenue deduction to manage the accounts through the period of time that the deferred occurs.
            Hope this helps. I will be interested to see what others say.
Victor Harding
Harding Security Services Inc
            It’s hard to teach an old dog new tricks, but here goes.  You buttress two of your positions with  “I have never seen this happen” and “Again I have not seen this happen”.  My father taught me a long time ago, and I tell my attorneys, the fact that you never heard of it or never saw it, “doesn’t make it so”.   You may be signaling your own inexperience or worse, ignorance.  Of course Victor is neither of these, so maybe it’s simply a difference of experience.
            Smart alarm companies, those using the Standard Form Agreements, bill in advance for Inspection and for Repair Service.  The RMR builds equity.  When those services are billed after the service is performed, the Repair Service is probably “per call” and there is likely no contract at all for the inspections.  Use the Standard Form Agreements and invoice in advance for these and all other services.  
            Since the smart move is to invoice in advance, there is good chance that you will have subscriber pay in advance.  They will have paid for post-closing services to be rendered, and it doesn’t matter if it’s monitoring, repair service, inspection, leasing, access control or guard service, just to mention a few. 
            There are different ways to address the adjustment for subscriber payments and accounts receivable.  It’s a matter of negotiations and suppose there is no right or wrong way.  
  *  sometimes a buyer will pay all or a percentage of unpaid accounts receivables
  *  sometimes a seller will retain all pre-paid revenue [deferred revenue]
  *  sometimes the parties will simply adjust pre and post-closing revenue, paid or unpaid.  This is what I prefer when I draft the agreement.  
            Keep in mind that an agreement is just a bunch of words assembled in the document and the parties can create whatever terms they can imagine.  What you also need to keep in mind is that the more complex the terms, the more burdensome the adjustment procedure, the more likely there will be disputes post-closing.  You have to balance that against fairness and allocation of risk.  Why should a buyer gamble on collecting accounts receivable.  Why should a seller give up accounts receivable for 50% or some other percentage.  
            Victor opines that in a large deal a buyer may not care about deferred revenue because it won’t cost that much to service the subscriber post-closing for the time the revenue was collected by the seller.  But this seems odd to me.  A buyer is willing to pay 40 times RMR, plus let a seller retain potentially 11 months of post-closing revenue?  That makes the deal 51 times, and worse, the subscriber won’t be invoiced for 11 months after the closing.  That subscriber can’t even fall into the 90 day arrears column for guarantee purposes.  
            Here’s an idea.  Keep it simple and keep it fair.  If the deal is 40 times RMR then don’t try and push it to 45 or 35 by complicated language and formulas.  Don’t try and give with the right hand and take with the left hand.  The goal in every deal should be to close, without dispute and with finality.  Walk from any deal if the seller or buyer is unreasonable and disputes likely.
Another comment
            Wait a minute.  An attorney advocating ‘just use wording everyone can understand’. Someone check for a fever. Not that it didn’t make perfect sense. 
Zeke Lay

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
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