Revenue through Channel Partners - Gross or Net?

A common conversation with clients revolves around whether they should show revenues generated through channel partners as a gross number (end user sales value) or a net number (after discounts, incentives, commissions or royalties have been accounted for). Since our definition of channel partner is pretty broad here - channel partner may be a dealer, distributor, value-added developer (VAD), value-added reseller (VAR) or a consultancy that serves as prime contractor - we should answer in broad terms. I've laid out some guidance that should help so that your revenue recognition is justifiable and defensible with buyers. As we know, if a buyer is going to base a valuation on a revenue multiple, then a larger revenue number will always win.

Booking Gross Revenues is generally appropriate if:

  1. The sales commission is subject to quantity discounts that are not known at the time of each individual sale or when revenue is known, for example: calculated quarterly and applied after the fact.
  2. The partner is paid a commission or royalty on each sale much like a company salesman, particularly when your company controls the end user price. The commission should show as COGS.
  3. If the revenue and/or cash flows around the partner to you.

Booking Net Revenues is generally appropriate if:

  1. The software license is sold to the partner at a discounted price as specified in the partner agreement.
  2. The licenses are inventoried by the partner/reseller. You shouldn't book revenues until later if the license can be sent back. (This is why many companies have been crucified.)
  3. The partner controls the end user license fee.
  4. If the license agreement is between the partner and the end user.
  5. If the license/software is embedded in a value-added deliverable by the partner that is then sold again under different commercial terms.
  6. If the invoice to the partner shows gross minus discount or commission and net revenue as amount due.
  7. If the revenue and/or cash flows through the partner to you.

Generally, buyers take a conservative approach, and will recast revenue that is not booked in a fashion consistent with their own practices. Further, your financials should reflect your business practice and the practice should be outlined in the partner agreements. We want to avoid a situation where we are exaggerating revenue or being inconsistent in our revenue recognition, as it can raise a red flag during due diligence.

Posted by , Senior Vice President on 3 October 2011
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