Improving your Revenue Quality and Thereby the Value and Marketability of your Business When it is Time to Sell

High-quality revenue is generally considered to be sales that are, profitable, sustainable, and predictable.  Businesses with high-quality revenue often trade at higher multiples than their peers with lower quality revenue, particularly when the buyer plans to continue to operate the business as a stand-alone entity.  That’s because it lowers the risk for the buyer, and there are often more buyers willing to bid aggressively in a well-run, competitive sales process.
This article provides some ideas that business owners may want to consider implementing, that can improve the quality of their revenue in advance of a sale and to increase their chances of a successful outcome, once in the market.

The highest-quality revenue comes from contracted sales with recurring revenue.  This type of revenue can usually be relied on by a new owner to generate cash flow which allows for the use of more debt financing and less equity to finance the transaction.  Longer contracts are better, assuming it generates profitable sales with reasonable pricing adjustment mechanisms and is with a reliable and stable payor.

Subscription revenue is also a very high-quality source of revenue and one of the reasons why Software as a Service (Saas) companies trade at such high multiples.  Anything a company can do to generate at least a portion of their sales as recurring service revenue will help drive value and the business’s marketability.  This is especially true in circumstances where the service is scalable, there is a low cost to service new customers and when the market opportunity is very large.

Lengthy customer tenure with very low customer churn rates is also generally considered to be a source of high-quality revenue.  All too often, companies emphasize programs and strategies to acquire new customers, and while important, retaining key customers is often more important when it comes to the value of your business when selling.  This is especially true in B2B companies where customers are difficult to acquire and costly to lose.

It’s often been said that you can’t manage what you don’t measure.  Companies that have a robust CRM (Customer Relationship Management) system in place to manage the entire organizations’ interaction with customers can address customer concerns early to improve retention.  They also help identify ways to increase sales with existing customers.  Taking this a little further, understanding your company’s Net Promoter Score (NPS), and the actions you can take to increase it, can drive value.  NPS is simply a tool that measures customer satisfaction and the likelihood they would recommend your product, service or company to someone else.

Simply putting more resources and a disproportionate effort in retaining customers that are growing rapidly can be an excellent way to grow the business.  However, it is important to make sure that this strategy is not taken to the extreme, as customer diversity is also an important component of revenue quality.  Whenever there are a lot of sales coming from only a few customers, a buyer will price the risk of defection into their offer.

Besides a diverse customer base, sales into unrelated markets, based on geography or market segments sometimes can be a driver of revenue quality.  However, there are limits to this strategy, particularly when diversifying revenue too thinly.  Focus should be directed towards markets that are not dominated by well capitalized competitors, and on the most profitable customers, products, product lines, etc.  The market should also be able to benefit from your business’s core competencies.

Most people understand that product, and/or product-line diversity can an important way to improve revenue-quality.  However, products and services that are low cost relative to the customers’ total expenditures are higher quality sources of revenue than the reverse.  Under these circumstances, customers tend to be less sensitive to pricing, and therefore gross margins can be higher.  Gross margins can be a proxy for high-quality revenue.

Some of the lowest sources of quality revenue are tender/bid business or a one-time project-related sales. In the case of tender or bid sales, it is also often the lowest margin.  Large-ticket, capital expenditure reliant business is difficult to predict, and volatile cash flow makes aggressive pricing for buyers a difficult proposition.
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Every business, regardless of the market it serves, has room to pivot and refocus on higher-quality revenue streams that will drive its value and marketability when it comes time to sell.

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