Pre-paid Services - Asset
or liability? 
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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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