Centri Tech Pulse Series: Helping Technology Companies Turn Challenges into Opportunities

As the economy continues to navigate an inflationary environment and the Federal Reserve response of increasing interest rates on reserve balances, additional pressure is being applied to the valuations of private and public technology companies. Investors are exhibiting more scrutiny on financial reporting and key financial metrics and challenging financial forecasts, resulting in management teams revisiting cash burn forecasts, the timing of funding rounds, and the structuring of equity and debt funding. While the market uncertainty creates challenges, it also opens opportunities for management teams to distinguish from the broader market to obtain additional capital financing from strategic partners.

Contract Structuring

Structuring customer arrangements can have a significant impact on the magnitude and timing of revenue recognition in accordance with ASC 606. The nature of customer arrangements in the technology industry continues to have unique complexities in structuring arrangements to achieve favorable revenue recognition. Technology investors analyze revenue as a key financial input for multiple valuation methods. Contract structuring considerations include:

  • Promises within the customer arrangements
  • Distinct performance obligations
  • Transaction price structuring
  • Allocation of the total transaction price to each distinct performance obligation
  • Contract term for each performance obligation
  • Timing of transfer of control for each distinct performance obligation

Structuring customer arrangements also impacts whether a seller and their customers can capitalize on certain costs related to software and implementations. Certain contract and delivery provisions determine whether a customer is receiving a license of functional intellectual property (a product) or a right to access software (a service). In a down market, incentivizing a customer to buy can be challenging, but tailoring arrangements so that the customer can capitalize instead of expense certain expenditures may be the difference to that customer meeting certain annual budget, debt covenant, and EBITDA constraints.

Key Financial Metric – SellerLicense of Functional IPRight to Access Software
Revenue recognition timingPoint-in-timeRatable over-time
Revenue recognition – Go-live reporting periodIncreaseDecrease
Revenue recognition – Post go-live reporting periodDecreaseIncrease
EBITDA – Go-live reporting periodIncreaseDecrease
EBITDA – Post go-live reporting periodDecreaseIncrease
Depreciation and amortizationDecreaseIncrease
Developed technology assetDecreaseIncrease
Key Financial Metric – BuyerLicense of Functional IPRight to Access Software
EBITDAIncreaseDecrease
Depreciation and amortizationIncreaseDecrease
Operating expensesDecreaseIncrease
Property, plant, and equipmentIncreaseDecrease
Working capitalDecreaseIncrease
Operating cash flowIncreaseDecrease
Investing cash flowDecreaseIncrease

How Centri Can Help

Centri can assist in evaluating contract structuring for favorable revenue recognition and capitalization of software accounting considerations by:

  • Serving as the central point of contact for ensuring that new arrangements with customers for each revenue stream are clearly defined and contract provisions structured for favorable revenue recognition
  • Advising on modification of terms and provisions of legacy arrangements with customers to achieve a more favorable revenue recognition within the guidance of ASC 606
  • Assist in developing contract structuring strategies for customer negotiations
  • Develop fair value of performance obligations for standalone selling price method determination and allocation of the transaction price to performance obligations
  • Develop revenue recognition reconciliation and financial system integration optimization for efficient and timely financial reporting
  • Develop capitalized software methodology, tracking, internal controls, and financial reporting
  • Prepare memorandum(s) outlining key terms, accounting analysis, and conclusions, including illustrative disclosures
  • Valuation of businesses, intellectual property, and equity instruments
  • M&A preparation for sell-side and buy-side due diligence of quality of earnings and customer arrangements
  • Financial forecasting and cash burn analysis

Contact us to learn how our experts can help you.

About Centri Business Consulting, LLC

Centri Business Consulting provides the highest quality advisory consulting services to its clients by being reliable and responsive to their needs. Centri provides companies with the expertise they need to meet their reporting demands. Centri specializes in financial reportinginternal controlstechnical accounting researchvaluationmergers & acquisitions, and tax, CFO and HR advisory services for companies of various sizes and industries. From complex technical accounting transactions to monthly financial reporting, our professionals can offer any organization the specialized expertise and multilayered skillsets to ensure the project is completed timely and accurately.

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