KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Deferred Revenue in sale
April 16, 2019
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Deferred revenue in sale
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Ken
I’m sure you have been asked this question before and everyone would find the answer interesting.
We are in the process of selling our alarm company and the buyer and I have a different take on what is deferred revenue.
1. Definition of deferred revenue :
a. How are the inspection contracts calculated in deferred:
Inspection work that has been completed
Inspection work not completed
b. How are full service contacts calculated?
c. How are software license renewals calculated under contract?
renewed
not renewed
Ron
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Response
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This is what happens when you resort to using “definitions” in your buy/sell agreement when it would be easier [and in my opinion more efficient and better] to just use words that everyone understands.
So what’s “deferred revenue” and why does it need to be defined [and a better question is why does it need to be debated?
Deferred revenue is money owed or paid by subscribers for post-closing services. It doesn’t matter whether the post-closing services is monitoring, repair or inspection. Consider the subscriber is billed annually for calendar year. Invoice goes out December 1 for January 1 through December 31 period. Subscriber pays January 31 for entire year. Company sells and closes February 1.
Buyer is paying 40 times. There are several scenarios that come to mind.
* Seller insists on retaining pre-paid revenue. In this case seller would get 11 months of post-closing monthly payments in addition to the 40 times paid by buyer
* buyer insists seller adjust for post-closing revenue. In this case, seller would owe buyer 11 months which would be deducted from the purchase price. Additional issue, does the 11 months get deducted from gross purchase price or from just the Holdback?
* another twist. The subscriber has not made payment but buyer insists that seller treat the payment as if it had been paid, requiring the 11 month credit. Seller then is entitled to retain the 11 months if and when it gets paid.
I don’t know if there is a right or wrong way to draft the buy/sell agreement; it’s a matter of negotiations. From my perspective I prefer there to be less “moving parts”, which means less chance for disagreement post-closing. I also prefer to do things the easy way; less complicated. And, I don’t see any reason for either seller or buyer to try and shift the risk of collection. I prefer adjusting accounts receivables when received. Seller retains A/C for pre-closing services and buyer gets the A/R for post-closing services.
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