Revenue may seem like a straightforward topic; what could be easier than adding up revenue? But the truth is that not all revenue is created equal. In the first blog in this series looking at consultancy financials, we outlined the profile of a healthy consulting business. In this blog we’re taking a closer look at the different components of the revenue line.
On the topic of scale: while buyers of consulting firms have told us that size is important, it can be trumped by other factors. Above a certain size, what scale indicates to a buyer is that you’ve found a valuable service offering and a method of selling it. Furthermore, a strong growth trajectory will trump revenue scale in most situations. Most buyers would prefer a high-growth $9,000,000 business over a flat $19,000,000 one because they would assume the faster growing business has a more valuable offering in the market. It will probably be easier to scale within their operation too.
So now to revenue. We said that it’s not all created equal, but what did we mean by this? Let’s take a look at the different characteristics of revenue:
- Recurring revenue: this is revenue that repeats each year in a very predictable way. This is extremely valuable as it reduces the need to sell each year to hit budget. Recurring revenue could come from a long-term contract or project, or it could be in the form of an outsourcing contract that lasts multiple years
- New client service revenue: This is a critical component as it represents new market adoption of your offering. But it is by definition new selling every year and so viewed as higher risk and, if it is a significant part of the future forecast, it could potentially drive a higher earn-out
- Existing client service revenue: This is easier to sell since a strong client relationship can support the sale of several projects over multiple years
- Product revenue: These are things such as training materials, software etc. and are usually seen as a follow-on sale to the core offering
- Reimbursed expenses: Expense reimbursements sometimes come with a small markup depending on the contract terms with the client, but are not normally seen as valuable revenue
So as you can see, some types of revenue are more important to a business and more appealing to a potential buyer. For an owner considering a sale, it’s important to clearly quantify the different kinds of revenue in your business and understand how they will be viewed by the buyer community. High growth businesses with significant recurring revenue can be more attractive than purely service consultancies that have to sell the entire revenue each year.
Fundamentally, buyers of your business will value two things about your revenue: How easy it will be to scale within their organization, and how much risk there is that it won’t work. Of course, other factors must also be taken into account, such as sector focus, geographic reach, business model and margin, so it’s never as simple as this! If you’re interested in finding out more about how to grow and sell your consulting firm you can download our quick guide here.
Our third blog in this series of consultancy financials will be looking at the different kinds of margins and how they affect value.
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