Anonymised, illustrative composite. The confidential information memorandum described 78% recurring revenue under three-year customer contracts. The contracts themselves said the customers could leave on 30 days' notice, any time, for any reason.
At a glance
A financial buyer agreed, subject to diligence, to acquire 100% of a business-services company for a $12 million enterprise value, priced at 5.0× a trailing EBITDA of $2.4 million on annual revenue of $9.6 million. The confidential information memorandum highlighted 78% “recurring revenue” under customer agreements with a stated three-year term — the kind of figure a buyer prices a premium multiple against.
The seller’s data room included a contract summary schedule — customer name, start date, term, annual value — that diligence teams under time pressure sometimes treat as a substitute for the contracts themselves. This buyer’s counsel read the full signed agreements instead. Every major customer contract, representing $7.2 million of the company’s $9.6 million in revenue, carried a mutual termination-for-convenience clause: either party could end the relationship on 30 days’ written notice, at any time, for any reason. The clause had nothing to do with the target being sold, and nothing to do with assignment — it simply sat alongside the stated three-year term and overrode it in practice, because a termination right that either side can exercise at will functions as the real term of the relationship, whatever the front page of the contract says.
$7.2 million of $9.6 million in total revenue — 75% — sat behind contracts a customer could walk away from with a month’s notice. The buyer did not walk from the deal; instead it restructured how the $12 million price was paid. $1.5 million was held back in a 12-month escrow, with the release formula tied directly to the deal’s own logic: any reduction in run-rate EBITDA traceable to the identified at-risk accounts, valued at the deal’s own 5.0× multiple, would be deducted from the amount released to the seller.
During the escrow period, two customers on the flagged list exercised their 30-day right, together representing $900,000 of annual revenue. At an assumed 33% contribution margin on the lost accounts, the EBITDA impact was $297,000 a year. Applied through the agreed formula, $297,000 × 5.0 = $1,485,000 — capped by the size of the escrow itself. The seller received back $15,000 of the original $1,500,000; the buyer retained $1,485,000 against a loss the deal’s own diligence had specifically anticipated.
A clause allowing either party to terminate on notice is enforceable on its own terms regardless of a stated contract length; a “three-year agreement” with a 30-day walk-away right is not, in any commercial sense, a three-year commitment. Because that risk was identified and quantified before signing, the parties were able to write a contractual mechanism — this deal’s own escrow-release formula, a drafting choice, not a legal default — that converted an open-ended commercial risk into a defined, capped, and mechanically resolvable one, along the same lines the sister firm’s guidance on structuring a business-sale escrow describes for other holdback and indemnity mechanics.
Had the buyer relied on the CIM’s “78% recurring, three-year contracts” framing and priced the deal without reading the termination clauses, the $297,000 annual EBITDA hit from the two departures would have surfaced as an unexplained shortfall against the first-year operating budget — with no purchase-price mechanism to recover any of it, because nothing in the deal had flagged the risk as one worth pricing for. The same $1,485,000 that came back to the buyer through the escrow would instead have simply been gone, absorbed as underperformance against a deal thesis nobody had adjusted for the real terms of the customer base.
The tell is a contract summary schedule that lists a “term” column without a corresponding “termination rights” column. A stated term describes how long an agreement is supposed to last absent a triggering event; a termination-for-convenience clause is that triggering event, sitting a few clauses further into the same document. Any diligence checklist that stops at the summary schedule, rather than requiring the full signed contracts for every account representing a material share of revenue, will miss exactly this pattern.
The deal closed on schedule at the original $12 million headline price, with the structure — not the number — doing the work of pricing the risk. When the anticipated attrition occurred, the escrow mechanism resolved it in the buyer’s favour without a dispute, because both sides had agreed the formula in advance, before either side knew which specific customers, if any, would actually leave.
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