What Is Your Business Worth?

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Today's special guest is Bill Vinck

Thoughts on Revenue

M&A and Revenue Clarity: When is a dollar worth more than a dollar?

Overview

Not all forms of revenue are equally valuable. Revenue types differ in important respects, and types have a hierarchy. A “subscription” dollar can be seen as more valuable than a “product” dollar. Revenue types and their relative values frequently arise in M&A conversations.

We will consider the topic from several related perspectives, beginning with the revenue types typically found in IT businesses. We’ll continue discussing other revenue characteristics and associated metrics, including margin and scalability.

These ideas are arrayed in a matrix that summarizes them in a fashion potentially useful to a management team for planning purposes and facilitating business analysis discussions in an M&A situation.


Revenue Types:

  • Subscription: Revenue is generated when a client executes a contract of a year or longer to receive access to the firm’s technology. SaaS is an example.
  • Subscription Add-Ons: Some firms provide add-on products for a fee to subscription product clients.
  • Service Annuity: Revenue is generated when a client executes a contract for a year or longer for a specific service. Maintenance contracts are an example.
  • Project: Revenue is generated when a client executes a contract for a specific service described in the project scope of work and the service is completed. This type has no ARR but may have historical repeat revenue from certain clients.
  • Product: Revenue is generated when a 3rd party product is sold, and the client takes title.

Revenue Metrics:

  • ARR: Annual recurring revenue amounts. Specified in the contracts.
  • Margin: Current margin percentage.
  • Scalability: Ease with which new clients can be added without significant incremental expense.
  • Rate of Growth: Percentage annual increase for this type of revenue.
  • Contract Duration: Average duration of contract.
  • Churn: Percentage of clients who leave or downgrade this service.
  • Growth Initiatives: Roster of projects conducted internally with the specific intention of improving the revenue characteristic under consideration.
  • Expected Impact: The expected result of each initiative.

Summary

Management Matrix (download the worksheet)

Valuation spreadsheet

Conclusion

By developing and maintaining a matrix like this, a management team has a simple tool to see current discrete revenue trends. It displays a key view of the current revenue picture. Further, it can plan and track revenue characteristic enhancement projects.

For a firm anticipating transition, the matrix is a simple tool to begin business analysis and valuation


Bill Vinck
has joined Mighty Underdogs to help our members with succession planning and buying/selling to grow their business or family wealth. "Your business is an investment of time and money. What is the value your hard work has created?"



Categories: Strategy & Planning