Wear the glasses of your future acquirer in assessing the quality of your revenues
Not all revenues are of equal value when it comes to the view your future company acquirer will take as they determine what value to place on your business. A few years prior to an exit, put on a potential acquirer’s glasses and ask yourself and your leadership team these questions:
- Is our overall company financial performance reliant on one or a multiple of revenue streams? (e.g., one product or service or multiple ones?) Sometimes a single source of revenue can be viewed as higher risk to an acquirer versus seeing a diversified portfolio.
- What is the predictability of our revenue stream(s)? Acquirer’s assign higher valuations to those businesses with more predictable revenues. Think about what you could do to take all or some of your revenue and move it to being highly predictable such as through multi-year customer purchasing agreements, preventative or predictive type services you could offer or even a software application that you could get subscription and maintenance fees from.
- Do we have good diversity of customers, so your revenue isn’t too heavily reliant on a small number of customers? Generally, acquirer’s will see risk when more than 15% of your revenues are coming from a single customer.
- Do we know the gross margin performance related to our revenue stream(s)? An acquirer will want to understand the profit margin you get specific to each revenue stream. If your company revenues come from multiple products or services, be able to present your future acquirer the gross profit you derive from each.
- Do we have good line of sight to future, ongoing revenue growth? Acquirer’s will many times wonder if you are wanting to sell your company because you believe it’s nearing the end of its growth potential. To reduce this concern, be able to show that you have a sales opportunity pipeline filled with remaining growth potential so that under their ownership, the positive performance of your company can continue.
The bottom line is this – don’t be focused on just the total revenue of your company but pay equal attention to the quality of it. Acquirer’s will assign very different valuations to two businesses with similar total revenue levels but the one with a higher quality of revenues is likely to receive a much higher exit valuation. This could lead to one seller being unhappy with the outcome of selling their company and the other being euphoric. Get the plan in place today to be one of the euphoric sellers in the future.
