COMMERCIAL CONTRACTS | SECURITY OR ILLUSION

On paper, they can look like gold: long-term agreements, impressive values, promises of recurring revenue.

But the reality is not all contracts carry the same weight when it comes to risk, strength, and ultimately, valuation.

Valuation, let’s touch on that quickly because we are not just referring to valuation associated with a sale event; importantly, we are referring to a valuation in relation to bringing in capital for growth.

In fact, many contracts give a false sense of security; understanding the real value of your contracts is another high-impact exercise you can lead.

Why Contracts Matter in a Sale

Contracts are often presented as proof that revenue is “locked in.” Do all key contracts pass the test?

1. Renewal Terms. Do contracts automatically roll over, or does the customer have to re-sign actively? Contracts that rely on active renewal can be terminated or expire overnight.

2. Termination Clauses. Can the customer walk away with 30 days’ notice, or are there meaningful penalties for early termination? A three-year deal with a 30-day out clause is essentially a one-month contract.

3. Pricing Protections. Do contracts allow for cost pass-throughs or inflation-linked adjustments? Without this, margin erosion becomes inevitable as costs rise.

4. Change of Control. Does the contract require a change of control consent, and who is this mutual, or one-directional? A material change of control can be enough to render that customers' value lifeless.

5. Counterparty Strength. Is the contract with a financially stable, reliable business? A five-year deal with a shaky counterparty is worth less than a one-year deal with a blue-chip customer.

The Illusion of Security

Here’s a common example.

A business proudly announces that “80% of revenue is under contract.” Sounds great, but once the fine print is reviewed, it turns out:

• Half the contracts can be terminated with 30 days’ notice.

• Renewal terms are weak, with no automatic rollover.

• Pricing is fixed, even though the business’s input costs have risen 12% in the last year.

From an outside perspective, that “secure revenue” story collapses. What looked like gold was really just glitter.

Where the Real Value Lies

High-quality contracts are rare, but when they exist, they add enormous weight to a valuation. The strongest contracts typically share these traits:

• Duration with Teeth. Multi-year terms with clear renewal mechanisms and notice periods of 90+ days.

• Pricing Flexibility Clauses that adjust for inflation, currency movements, or rising supplier costs.

• Balanced Exit Terms. Mutual rights and responsibilities, not one-sided “customer-friendly” outs.

• Strong Counterparties. Contracts signed with customers who are both financially sound and strategically aligned.

How To Assess Contract Strength:

Here is a simple way to separate illusion from reality:

1. Identify Key Contracts. Pull the top 10 customer contracts by revenue.

2. Review Critical Clauses. Focus on renewal, termination, pricing, and customer strength.

3. Score Each Contract. Use a traffic light system (Green = Strong, Amber = Medium, Red = Weak).

4. Build a Risk Matrix. Summarise the findings into a single-page chart that highlights where the value really lies.

This exercise is simple, but the impact is high. Contracts aren’t inherently valuable. Their terms determine their worth. This exercise allows SME’s to:

• Grow with higher certainty.

• Build stronger negotiating leverage when it’s time to sell.

Summary

The difference between “illusion” and “security” can be millions in enterprise value. The SME’s who undertake this exercise, well, they’re building better businesses.