Pre-paid Services - Asset or liability? how to buy a business mail order restaurant service


Many businesses offer a discount to pre-pay for goods or services. This may be a way of building up a business quickly, raising capitol for expansion, the result of a membership into an organization or a sales tool for a commitment.

Well, when the time comes to sell the business, how is it handled? If you are buying the business, you will have to honor those prior sales and make good the seller's previous promise.

First, you need to examine when and why the tactic was done. Was it merely to increase sales on the books for preparation of a sale? If the seller sold discounted dinner coupons 60 days before the sale of the restaurant, this may be a liability to the new owner. If an ISP company sold 12 month service contracts for the price of 8 months on a pre-paid basis, this may be an asset to the buyer.

Some schools and clubs make their monies on 'selling' memberships. Some other business for profit organizations make their monies on 'renewals'. Do you think a health club or martial art school sells more memberships or renewals? And what about a professional organization or your ISP?

So you need to explore it a step deeper. What is the renewal rate of those prepaid services? They may be worth a multiple of sales instead of a negative on the balance sheet... It cost's much less to keep a customer than it does to attract a new one. Once someone has your service and is happy, it may not be worth the trouble and aggravation to switch to someone else that is running the special sign up offer!

There is no fast rule, just something to make you think...

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