Not all revenues are created equal as they relate to building business valuation
When your company is faced with an exciting new growth opportunity, do you have a good process for vetting it to ensure it will help build the long-term value, or worth, of your company?
Here is a check list to help you vet how a growth opportunity could impact the worth of your business:
Predictable Revenue – predictable revenues create higher company worth than those that are more one off, transactional in nature. Does this opportunity bring you a degree of predictable revenue such as you get from long-term purchasing agreements, subscription models, licensing or royalty fees, etc.?
Diversity of Revenue – evaluate what the opportunity will mean to your overall revenue mix and concentration. Will it help you build a positive diversity, or might it cause a risky concentration?
Margin – assess whether the opportunity will be equal to or hopefully greater than your average company margin today. Opportunities that can be captured at a greater margin than the overall average margin for your business will be viewed as creating greater company worth for your business.
Competence Leveraging – does the new opportunity allow you to fully leverage what your company’s capabilities currently are or will it require you to invest in new ones? If new capabilities must be built, is the cost of doing so factored into your analysis of the opportunity?
Fulfillment Economics – will the new opportunity fully leverage your current product/service fulfillment model or will it require a variation? Fulfillment model variations generally translate to higher cost for your business so ask yourself, have I factored in a potential variation in to my margin analysis?
Contract Terms – will the opportunity require you to sign agreements or contracts that will be the same, more, or less attractive to others you have signed? For those thinking of selling one day to a third party, know going into a new opportunity that the future acquirer will look closely at the contract terms you sign up for and will determine what this means to the valuation they place on your company.
Working Capital Requirements – growth opportunities should be evaluated for their revenue, margin and working capital impact. Will the cash cycle (ie: Receivables timing) be different from your current business and/or will it place new raw material or finished goods requirements that you want to be aware of on the front end of evaluating the opportunity?
Brand Image – ask yourself how this new opportunity will confirm or potentially change your brand image in the market. By taking this new work, will customers (current or new) view your business in a more positive or potentially negative way as a result of taking on this new work.
Price Control – determine how the pricing going forward might change with this opportunity. The revenue and margin could be attractive in the early periods but how do you project it will evolve. Or perhaps to secure the opportunity you have to accept a lower margin initially, will you have an opportunity to improve the margin over time?
Liability Exposure – evaluate the opportunity as it relates to whether it will expose your company to the same or greater liability than you face currently. Just because it might increase exposure isn’t a deal breaker, but you will to be aware of this going in and making sure your pricing it accordingly to reflect the increased risk.
The bottom line here is as your company pursues new growth opportunities, have a process for how you will evaluate what they will mean to the longer-term worth of your business. Having this discipline could help you command a premium for your business one day.
