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Mirus Capital Advisors, Business Valuation, Pre-sale Planning, Selling a Business

The $360 billion revenue question

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The way you recognize you company’s revenues is about to change.

In particular, the way companies recognize revenue for licenses and long-term contracts, including the those traditionally measured under a “percentage-of-completion” method, will be affected by changes FASB has planned to make effective January 1, 2017.  The total amount of deferred revenue on the books of the S&P 500? $360 billion.  That includes over $50 billion for Boeing, Microsoft and IBM combined.  The new rules may impact the timing of recognizing hundreds of billions of dollars of revenues.

The measurement and recognition of deferred revenue is often under-analyzed by private companies considering M&A and these new rules may create further risk.

How revenue is recognized and how deferred revenue is treated in M&A are areas where many private companies miss the boat in a big way.  We’ve heard the stories from acquirers of the business owner who thought he was selling a $20 million company only to find out he’d been incorrectly recognizing revenue too soon (at least according to GAAP).  In some cases, that $20 million company is really a $25 million company in the eye of an acquirer with a less conservative revenue recognition policy. There are so many ways for private companies to leave money on the table and revenue recognition is one of the big ones.

The changes to GAAP will create risks and opportunities for middle market companies who negotiate acquisitions by larger public companies.  Aligning  your revenue recognition with the policies adopted by large acquirers, either in practice (e.g. demonstrated in an audit) or in pro forma adjustments, is one way to be sure buyers are making apples-to-apples comparisons when valuing your business.

It’s an area likely to get a lot of attention over the next couple of years and certainly worth considering if you’re thinking of selling your business.

You can find more of Alan’s perspectives at www.merger.com or contact him at fullerton@merger.com.