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Posted by Nomen Nescio on May 13, 2008, 8:40 pm
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>So, "technically" I don't think anyone can deny, it thus
>follows ..... that the shorter the term of the contract the lower the
>selling price is likely to be. I wonder to what point that gets
>carried.
>
>Does a one year contract get less than a two year? A three year less
>than a four .... a five? I would think and hope so. What about
>contracts that are partially expired. Like a one year contract that's
>only 3 or 4 months from expiration? Or a three or four or five year?
>
>Would a 5 year contract that's got 4 years to go be worth more than
>one that's only got 6 months left? and what about renewals? Some
>contracts are renewable for a set period of time. Say a 5 year
>contract ..... but it only renews for one year or on a monthly basis
>rather than another 5 years.
>( and I realize that, such as my state, some clients must be notified
>prior to renewal, with the right to cancel)
>
>
>I wonder how much this all affects pricing? Maybe it just depends on
>who's buying.(?)
It's not a cookie-cutter formula. Accounts have different values to
different buyers, for different reasons. If you are selling to a company
that likes to enforce their contracts aggressively and sue their
ex-customers for the balance of their contracts, then that company will pay
more for up-to-date contracts.
However, some buyers are more interested in a company's attrition rate.
That gives the buyer an idea of how long the accounts are likely to stick
around. They're also interested in the payment history of the accounts:
long-term accounts that always pay on time are like gold, even if there
aren't long-term contracts to enforce.
In some areas, five-year residential contracts may not be the norm. In
other areas, small claims judges don't like to enforce automatic renewals,
especially long-term renewals the customer claimed not to know about. So,
in these areas long-term monitoring contracts for customer-owned systems
may not be enforceable, or collectable, at least in practical terms. The
value of such accounts may be based more on anticipated longevity,
especially on residential accounts that pay a fairly low monthly fee.
Who's going to sue a residential account that cancels with four months left
on a one year contract? And who needs the bad publicity?
As far as contracts being worth more if they have a lot of time left,
remember that accounts aren't usually priced out individually, with
different multiples for different accounts. The buyer is willing to pay X
months for all the seller's accounts, and he bases the multiple on his
evaluation of the account package as a whole. The length of the contracts
is really only important to a buyer who intends to enforce those contracts.
Otherwise, the buyer is concerned with how long the accounts will be likely
to stick around: people move, people die, etc. That's where service
records, quality of equipment and installation, attrition rate, and
payment history can up the value of your accounts.
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