For our Contract Design Services, we valuate and optimize contracts.
Contracts are part of business. Each contract is composed by multiple obligations and rights that matter for decisions and valuations. But contracts are usually built following standardized norms and are usually analyzed only by a legal standpoint and by means of intuition, rather than by a financial or quantitative approach. At Watson & Noble, we take a financial and quantitative approach to contracts.
First, we study the project or firm subjacent to the contract. We identify the sources of value creation and risk of this project or firm and proceed with its valuation. Then we analyze the impact of the contract clauses on this valuation under the point of view of our clients.
Our Contract Design Service includes the analysis of the impact of clauses that may only be activated in the future. Because we simulate multiple paths for all value drivers, these clauses are activated in some paths. Given the weights of the paths these clauses are activated, we measure their final impact. For example, we try to answer questions like: How does the exit clause affect valuation? How does an option to renovate contract affect valuation? How does an option to buyback or other affect valuation?
This service can be further employed to suggest modifications that can generate further value for our clients. In this case, we try to answer questions like: How can the penalty for exit be such that there is further value creation? How much should it be? Should it be linear, decreasing or increasing over time?