Growing up in a small town, I understand that a dollar is a dollar. You work hard for it and it is valued. But, in my past 16 years at the helm of Marco, growing the business and buying others, I have learned that not all sales revenue is equal. Some 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.
While working with about 100 businesses to evaluate a potential purchase, we have identified a series of quality revenue indicators. They can help businesses of all sizes go beyond their total revenue number to evaluate the quality of it.
- Duration of customer contracts
Most businesses track the total number of contractual relationships they have with customers. But it is the length of those contracts that establish your value (whether you’re selling or not). Three-year contracts are good; five-year contracts are better. The duration of contracts show customer loyalty (retention) and projected revenue. - 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. Strong businesses have a good distribution of accounts, industries and a proper mix of client size – small, medium and large organizations. Having too many customers in any given segment puts revenue at a potential risk going forward. - Service to hardware composition
In our industry, service trumps hardware. Not that long ago, it was common for businesses likes ours to sell more hardware than service. While that is still the case, the most valuable companies provide more service than sell product. That applies to a variety of industries. Service has a higher propensity to be contracted, which is a better form of revenue. Bundled agreements, including product and service, have value, too. They establish a recurring revenue stream that provides a more predictable profit picture. - Diversification
Some revenue can make you more profitable than others and better position you for future revenue. Organizations that can demonstrate a track record of cross-selling a broad range of product or service categories see more success. For example, as a forward-thinking copier dealer, Marco effectively provides managed print and IT services, production print, wide-format printing and software solutions. Take the time to map out what this looks like for your organization. - Sales performance
How you get this revenue matters, too. You’re really only as good as your people. Strong organizations have a strong sales infrastructure. That includes sales productivity and specifically the number of sales reps it takes the company to generate the revenue. You want 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.
How do you think you stack up? Organizations that keep working on these areas are stronger today – and the ones that others want to buy. That’s when you know that your revenue is high quality.
