Treatment of short and long term deferred revenue in terminal value calculation?
As the topic title says, trying to think about the treatment of short and long term deferred revenue in a terminal value calculation. This is a company with substantial buildup in it's LT-DR, but I'm fairly certain that LT-DR doesn't go into working capital, and so there's a ton left over after the end of projections. But how do I account for that in a terminal value calculation? I can't find anything about the treatment with that. Just a UFCFn-1*(1+g) doesn't account for it very well, but something has to factor it in.
It’s an inflow of cash so you can include it in your DCF. Its not Working capital as you say, but it is a liability that appears in operating cash flow. FCF is commonly cash flow from operations less capex. It’s especially common with companies that have multi-year contracts.
Usually when a company gets acquired, the LT-DR might be treated as debt by the buyer, while the seller argues for LT-DR to appear in working capital. If treated as debt, then it lowers the cash that the Buyer needs to pay for the company. If treated as working capital, then seller gets to keep the cash from the LT-DR.
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