Good revenue growth can significantly enhance the valuation of a business and thus increase the take home for the exiting owner-manager. A shrewd business owner should work hard to generate positive revenue momentum in the run up to exit. However, there are actually only 4 ways to increase revenue and we review them below through an acquirer’s lens.
Win more customers. We love to see it, but we will always be asking a few questions to dig deeper. Who is winning the customers? Is this a slick marketing and sales engine that can scale or the owner-manager’s personal network? Are the new customer’s being won the same or higher quality as the existing customer base or are they of a low margin and small size? Is new revenue contracted or just a short term burst of one-off sales?
Increase average transaction revenue. What we are look for here, is what comprises the increased transaction size? Is it just more of the same or are there multiple-service lines being sold (increasing customer stickiness)? Are the new services being sold commodities or bespoke/high value items?
Increase the frequency of transactions per customer. This is tricky to increase for some recurring revenue / subscription businesses as the core of their business may be a monthly transaction. However, what about the non-recurring elements such a consulting advisory or project implementation fees on top of the monthly payments? What about usage elements that are purchased in blocks? Recurring revenue is great, but when those clients also have a high frequency of non-recurring transactions (perhaps even repeating revenue) they are engaged and truly value your service.
Increase prices. Here we look for 2 key things. First, has the business been able to consistently raise prices on an annual basis (higher than inflation / market average)? If so, this demonstrates that customers are sticky and also that any future price rises are likely to be sustained sustained. We are highly sceptical of the one-off price rise just before the business goes to market – there’s not evidence that it’s sustainable and that customers won’t leave. Secondly, excluding price rises, we look for business that price at a premium – they are at the top end of the market and are not shy about saying so. High pricing justified through high quality attracts and retains good customers.
All of these revenue raising levers are valued by an acquirer, but the owner-manager should first focus on increasing prices as it’s a multi-year process and every penny from the price increase goes straight to the bottom line. If done right, it’s free money.