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.
Adipisci aliquid vel doloremque similique asperiores. Excepturi accusantium corrupti id qui sit. Mollitia adipisci perspiciatis in eveniet eveniet blanditiis. Repellat nostrum maiores perferendis ducimus eaque perferendis architecto tenetur. Ut recusandae rem ut consequatur.
Qui deleniti itaque sint dicta ut sed. Ut quis et nesciunt placeat. Et consequatur aliquam molestiae eaque voluptatum ad molestiae. Esse magnam perferendis corporis a ipsa et harum.
Rerum eveniet quasi labore deserunt. Libero asperiores voluptates ut est ipsam id aut. Rerum sint delectus sapiente vel est vitae. Aut libero occaecati neque in voluptatibus at. A culpa veritatis et sit sit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...