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Acquisitions Blog

Not All Revenue Is Equal

by Jeff Gau on October 22

Growing up in a small town, I was taught that a dollar is a dollar. You work hard for it and it is valued. But, in my past 15 years at the helm of Marco growing the business and buying others, I have learned that not all revenue is equal. Some revenue is actually better than others.

Where your revenue comes from matters. There is a direct correlation between the quality of the revenue streams and the earnings of the company. And when selling the business, the quality of the revenue impacts the valuation. 

We have worked with almost 100 businesses to evaluate a potential purchase and have identified a series of quality revenue indicators. Here’s what we look for:

  1. Duration of customer contracts
    It’s common to consider the number of contractual relationships with your customers. But it is the length of those contracts that matter most to buyers. Three-year contracts are good; five-year contracts are better. Buyers want to understand your client relationships to assess loyalty (retention) and projected revenue.

  2. Customer concentration
    The goal here is resiliency and balance. You don’t want any one customer to account for more than 10 percent of your total revenue. Buyers want to see a good distribution of accounts, industries and a proper mix of client size – small, medium and large organizations. Having too many customers in a certain segment puts potential risk on revenue going forward.

  3. Service to hardware composition
    Service trumps hardware. Not that long ago it was common for businesses to sell more hardware than service. While that is still the case, the most valuable companies provide more service than sell product. Service has a higher propensity to be contracted, which is a better form of revenue.

  4. Bundled agreements
    Do you keep your hardware and service separate or bundle agreements? The latter is most appealing to potential buyers. Bundled agreements establish a recurring revenue stream that provides a more predictable profit picture. 

  5. Solution and product make up
    The best way to maximize your valuation is to have diversity in your product and solution offerings. Organizations that can demonstrate a track record of cross-selling a broad range of product categories are most attractive. Some revenue can make you more profitable than others and better position you for future revenue. A forward-thinking copier dealer will effectively provide managed print and IT services, production print, wide-format printing and software solutions.

  6. Sales performance
    How you get this revenue matters, too. Buyers want to see a strong sales infrastructure. We look at sales productivity and specifically the number of sales reps it takes the company to generate the revenue. We like to see a good mix of veteran, mid- and entry-level sales experience. A good, competent sales team will help achieve ongoing growth in the market and is viewed as a strong asset. Lack of sales competency will detract from your valuation.

A balanced revenue strategy is what will make you more attractive to buyers and potentially elevate your selling price.

How do you think you stack up? My advice: don’t sweat it. You have what you have. For the record, most businesses aren’t able to check all the boxes. Even when not all the parameters line up, we’ll move forward with a strong acquisition. If you’d like to find out how your business might be valued, give me a call.

Call Jeff Gau Today 800.847.3051  Let's Talk

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