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Water Mill

Dimension 05 of 07

Revenue Quality

Is your revenue recurring, contracted, and concentrated in the right places?

Why buyers price against it

Two businesses can report the same profit and be worth very different amounts, and revenue quality is usually the reason. A buyer is paying a multiple of earnings, and that multiple reflects how confident they are that the earnings continue. Revenue that is contracted, recurring and spread across many customers is confidence. Revenue that is one-off, informal and concentrated in a few relationships is doubt, and doubt lowers the multiple.

What weak looks like

A handful of customers making up most of the revenue. Sales that depend on the owner’s relationships rather than the company’s offer. Work won project by project with nothing contracted beyond the current one. Pricing set by negotiation each time rather than by a repeatable model. Each of these is survivable while you run the business. To a buyer inheriting it, each one is a reason the revenue might not be there next year.

How to strengthen it

Move as much revenue as you can from one-off to recurring, and from handshake to contract. Broaden the customer base so no single relationship can sink the year. Shift key relationships from you onto the company and named people. Where you can, build switching costs and renewal into how customers buy. You are not only growing revenue. You are making the revenue you already have easier for a buyer to rely on, which is what they pay the multiple for.

Frequently asked questions

Why is recurring revenue worth more than one-off revenue?
Because a buyer can count on it. Revenue that renews on a contract carries into next year with far less selling effort and far less risk. One-off revenue has to be won again from zero every period, so a buyer discounts it for the uncertainty of whether it repeats.
How much customer concentration is too much?
There is no single line, but once one customer is a large share of revenue, a buyer treats the loss of that customer as a real and present risk to the price. The concern is not only the percentage. It is whether the relationship is contracted, how long it has held, and whether it depends on the owner.

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