Deferred revenue - How to model in LBO
Hi all, how do i forecast deferred revenue in an LBO case study? I assume, unlike the other NWC items there is no Days Deferred or sth? % of Sales?
Also: having a high deferred revenue balance, is that good? I assume for software companies, that otherwise would be CF negative, it is as increases CF?
While I am not yet in PE (moving over this summer), I can chime in.
To your first question, I have typically seen it done as a percentage of sales.
To your second question - it is complicated. The overall balance is important, but the more important factor is that deferred revenue is growing over time. From an accounting perspective, as liabilities grow, they can be seen as a cash inflow. From a practical business perspective, in a growing sales scenario, it would mean that deferred revenue is also growing. Essentially, buyers are giving the firm a short-term (sub 1-2 year) loan for free. A lot of companies also use change in deferred revenue as an input in a metric called Adj. Cash EBITDA. It is essentially Adj. EBITDA + Change in Deferred Revenue. If change in deferred revenue is growing (i.e. deferred revenue is increasing due to increasing sales), that would increase Cash EBITDA. A number of software firms use this metric, and it is used in private equity processes as well.
Let me know if anything is unclear - happy to provide more color.
Super clear to me - highly appreciated. And congrats on your PE gig!
FYI there's another thread in this forum recently that I and a few other people answered: "PE recruiting technical questions (software specific)"
The examples there give a good run-through of how deferred revenue works through the 3-statements with SaaS businesses and the impact.
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