Buyers don’t penalize you for overpaying. They penalize you for being locked in. A $72,000 annual software subscription with two years left on auto-renew doesn’t show up in quality of earnings as a bad deal—it shows up as a $144,000 escrow hold or a purchase price reduction, even if the software is best-in-class and you negotiated a volume discount.
The Discount Appears Before the Contract Is Even Bad
The problem isn’t that you’re paying too much. The problem is that the buyer can’t exit without penalty, and they price that constraint into the deal.
I’ve seen this with a $2.3M manufacturing business that had locked in a three-year ERP contract at $6,000/month. The software worked. The price was fair. But the buyer’s diligence team flagged it as a “non-terminable obligation” and modeled it as a liability because their standard stack used a different platform.
The seller assumed the contract would be neutral—maybe even a positive, since it demonstrated operational maturity. Instead, it became a $200K adjustment: $144K for the remaining term, plus another $60K estimated for migration and overlap costs. The buyer didn’t argue the software was overpriced. They argued they were buying a constraint they didn’t choose, and constraints cost money to unwind.
Why “Good Deal” and “Value Destroyer” Aren’t Opposites
Most owners evaluate vendor contracts on two axes: cost and performance. If the tool works and the price is competitive, the contract feels like a win.
But enterprise value operates on a third axis: transferability.
A contract that’s optimized for your operation can be a liability in a transaction if it doesn’t transfer cleanly. Auto-renewing terms, volume commitments tied to your specific headcount or revenue, and non-assignable clauses all create friction. Friction gets priced.
I worked with a service business that had negotiated a sweetheart deal on health insurance by bundling it with their payroll provider. The rate was 18% below market. But the contract required a three-year commitment and was tied to the owner’s personal guarantee.
When the buyer’s broker ran comps, they didn’t credit the savings—they flagged the guarantee as a post-close risk and the commitment period as a flexibility cost. The “good deal” became a $90K holdback because the buyer couldn’t re-shop coverage without triggering an early termination fee.
The mechanism is simple: buyers pay for optionality. Every obligation you’ve locked in is an option they don’t have.
The Words You Use Tell Me Where the Discount Is Hiding
When an owner says “we’re locked in but it’s a great rate,” I know there’s a valuation leak. When they say “we prepaid to get the discount,” I know there’s a working capital adjustment coming. The language reveals the structure, and the structure reveals the haircut.
Prepaid contracts are the worst offenders. A $50,000 annual subscription paid upfront to save 15% looks like smart cash management. In a transaction, it’s a $50,000 use of working capital that the buyer doesn’t get back, and it’s often excluded from the working capital peg entirely.
You saved $8,800 on the subscription and gave up $50,000 in enterprise value because the buyer has to write that check again in twelve months and gets no credit for the cash you already spent.
Auto-renewals with notice periods create another trap. A contract that renews unless you cancel 90 days prior feels like a normal vendor relationship until you’re 60 days from close and realize you’re about to lock the buyer into another year.
I’ve seen sellers scramble to send termination notices mid-diligence, only to find out the vendor requires board resolution or that the notice period is 120 days, not 90. The buyer doesn’t care whose fault it is—they care that they’re inheriting an obligation they didn’t budget for.
What Actually Protects Value
Month-to-month terms cost more per month and protect more value in a sale. A $7,500/month contract with 30-day termination is almost always better for enterprise value than a $6,000/month contract with a two-year tail, even though you’re paying $18,000 more annually.
The math is straightforward: the $18,000 premium is an operating expense that flows through EBITDA. The two-year tail is a $144,000 balance sheet liability that flows through purchase price.
Buyers will pay a multiple on the higher expense, but they’ll discount dollar-for-dollar (or worse) for the obligation.
Assignability matters more than price. If the contract transfers without re-underwriting, without personal guarantees, and without the vendor’s consent, it’s neutral to value even if the rate is high. If it requires the vendor to approve the new owner, re-run credit, or re-price based on the buyer’s volume, it’s a discount waiting to happen.
I tell owners to read their vendor contracts for the word “non-assignable” and the phrase “at vendor’s sole discretion.” Those six words can cost you a multiple of the annual contract value, because the buyer has to assume the vendor says no and they have to replace the service on day one.
The Constraint You Chose Becomes the Discount They Demand
The three-year software deal that became a $200K haircut wasn’t a bad decision when it was signed. It was a rational trade: lower annual cost in exchange for commitment.
But enterprise value doesn’t care about the rationality of past decisions. It cares about the flexibility of future ones.
Every auto-renewing contract is a bet that you won’t sell during the term. Most owners don’t think of it that way because most owners don’t plan to sell in the next 90 days. But the average hold period for a private company is seven years, and the average vendor contract is three. The odds that you’ll be in diligence with an active obligation are higher than most people price in.
The fix isn’t to avoid all commitments. It’s to know which commitments create balance sheet liabilities and which ones flow through the P&L. The ones that lock the buyer in—auto-renew, prepaid, non-assignable, tied to your guarantee—are the ones that get discounted. The ones that transfer cleanly or terminate on reasonable notice are the ones that don’t move the number.
About the Author
Tim Corcoran is VP / CFO at CGI Digital in Rochester, NY.