The Million-Dollar Contract: How Future Business Affects a Company’s Value
10 August 2026
Imagine a business owner who wants to sell.
Unfortunately, the last few years haven’t been particularly good. The owner bought the company when it was performing well, but after the acquisition, things began to slide. Revenue declined, profits disappeared, and the business even lost money in one of the past several years.
Based strictly on historical financial performance, there isn’t much value left beyond the company’s tangible assets.
Then everything changes.
The company lands a major contract with a large, publicly traded corporation. The contract could generate millions of dollars in revenue over the next six to eight years.
Suddenly, the seller believes the business is worth a fortune.
Is it?
Maybe.
But before assigning substantial value to that contract, a buyer—or the broker representing the seller—needs to answer a much more important question:
How certain is the future cash flow?
Buyers Pay for Future Cash Flow
Historical financial statements are important when valuing a business because they provide evidence of what the company has been capable of producing. But ultimately, a buyer isn’t purchasing the past.
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The buyer is purchasing the expectation of future cash flow.
That’s why a major new contract can dramatically change the valuation of an otherwise poorly performing company. If that contract is likely to produce substantial profits for years, those profits have value today.
But the key words are “likely to produce.”
Before putting a value on those future earnings, you need to understand exactly what the contract says.
Start With the Change-of-Control Clause
One of the first things to look for is a change-of-control or change-of-ownership provision.
Suppose ABC Company signs a multimillion-dollar agreement to provide services to a major corporation over the next eight years. That’s potentially a valuable asset.
But what happens if ABC Company is sold?
If the contract allows the customer to terminate or renegotiate the agreement when ownership changes, the seller has a serious problem. The contract may be enormously valuable to the current owner but worth considerably less to a buyer.
In some agreements, “change of control” doesn’t even require the entire company to be sold. The sale of a significant minority interest may be enough to trigger the provision.
That’s why the actual language matters.
Before marketing the company based on the value of that contract, the seller may need the customer to consent to the transaction, modify the agreement or otherwise confirm that the contract will survive a sale.
How Easily Can the Contract Be Terminated?
Change of ownership isn’t the only issue.
The contract needs to be reviewed for every significant termination provision.
Can the customer terminate without cause? What performance requirements must the company meet? Are there economic or market conditions that permit termination? How much notice is required?
A contract expected to generate $5 million over five years isn’t necessarily worth the same as $5 million of guaranteed revenue.
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If the customer can terminate the agreement with 180 days’ notice, a buyer will place substantially less value on years three, four and five than if the agreement is essentially locked in, assuming satisfactory performance.
The more certain the cash flow, the greater its present value.
Valuing the Future Cash Flow
Once the terms of the contract are understood, a discounted cash flow analysis can help determine what those anticipated future earnings are worth today.
Suppose you’re reasonably confident the contract will generate a specific amount of cash flow for the next three years. Those future dollars can be discounted back to their present value, reflecting both time and risk.
But problems arise when the seller and buyer have very different opinions about that risk.
The seller may say: “This contract will make the company worth $10 million in five years.”
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The buyer might agree with the projections but respond:
“Maybe—but the contract can be terminated in 18 months. I’m not paying you today for profits I may never receive.”
Both sides have a legitimate argument.
And that’s where deal structure becomes important.
An Earn-Out Can Bridge the Valuation Gap
An earn-out can be an effective solution when significant value depends on future events.
Instead of the buyer paying today for all the profits the seller expects the contract to generate, part of the purchase price is contingent upon those profits actually materializing.
If the contract remains in place and produces the anticipated cash flow, the seller receives additional payments. If the contract disappears or performs below expectations, the buyer hasn’t paid upfront for value that never materialized.
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This allows the seller to participate in the upside while protecting the buyer from uncertainty.
The details of an earn-out must, of course, be carefully structured and documented. But conceptually, it solves one of the biggest problems in transactions involving significant new contracts: who should bear the risk that the projected cash flow doesn’t happen?
The Bottom Line
Certainty creates value. A struggling company can become significantly more valuable almost overnight by landing a major customer or long-term contract.
But the face value of the contract isn’t what determines the company’s value.
Its value comes from the cash flow the contract is expected to generate—and the probability that the business will actually receive that cash flow.
So when a seller announces, “We just landed a multimillion-dollar contract,” don’t immediately start increasing the asking price.
Get the contract and read it carefully.
Understand the change-of-control provisions, termination rights, performance requirements and other conditions that could affect its durability.
Then determine how much of that future cash flow can reasonably be relied upon.
Because ultimately, buyers don’t pay for projections. They pay for the degree of confidence they can place in the future cash flow behind those projections.
“Get big quietly, so you don’t tip off potential competitors.”
– Chris Dixon, an investor at Andreessen Horowitz
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at
