A business with high revenue quality, i.e. diversified, sticky
and recurring revenues, is one that will likely be around for some
time to come, and is therefore highly valued. However, no business
is risk free. If revenues are project oriented with little
opportunity for repeat business, or one operates in an industry
with low barriers to entry, or a people dependent business such as
consulting, advertising or staffing, then what can you do to
realize as much value as possible?
Mitigate the risks inherent in the business model by focusing on
Differentiate your Product or Service
While at first glance, it may seem hard to differentiate a
business in a well-established and competitive sector, keeping an
eye on consumer trends combined with creative marketing can often
carve out a new profitable niche and present a tremendous growth
opportunity. Lululemon Athletica in the apparel sector and Chipotle
Mexican Grill in fast food, are examples of effective
Grow and Strengthen Customer Relationships
Reduce the unpredictability of project revenues by nurturing
customer relationships. If you can show that the same customers use
your services several years in a row then you have an argument for
revenue predictability. If that list of customers is more than
twenty then you have an argument for revenue diversity. Length of
customer relationships is also a good indicator of a high quality
Focus on Execution Excellence
In a service business, it comes down to attracting and keeping
the best personnel in order to deliver service excellence. Human
resources is a complex, multi-dimensional field and should include
processes for recruiting, role definition and responsibility,
position incentives and benefits, periodic feedback, and
documentation and procedures to fill gaps in the case of unexpected
Add Products and Markets
A one product company is riskier than a product line company. A
local company is riskier than one with a multi-national presence.
While it is easy to over-extend yourself, consider managed product
and geographical growth to mitigate risk.
Cultivate Multiple Supplier Relationships
Don't let your business become "captive" to a sole
supplier of component parts. Cultivate multiple supplier
relationships to reduce supplier power and dependence.
Analyze your profit margin to see where you want to drive your
sales — to higher-margin areas. A trend of improving margins
as a result of operational efficiencies and returns to scale will
result in a higher valuation.
Protect Intellectual Property
IP can be patented, copyrighted or treated as a trade secret.
Identify the IP in your business and make sure it is protected and
Build Your Brand
Spend time on all of the above will build your reputation and
The following chart summarizes various characteristics that
drive company value.
Operating risk should be addressed by implementing formal
processes. A business with formal processes, systems and
documentation reduces the dependence on individual talent and can
quickly respond to exogenous shocks. Items such as Service Level
Agreements ("SLAs"), marketing plans, job descriptions,
employment contracts, confidentiality agreements, professional
codes of conduct, organization charts, etc. institutionalize a
business. Documented processes are transferable value. Capturing
and transferring knowledge will make the business more sustainable
and more valuable.
If potential buyers feel that a business has a high risk
profile, they will either not buy it, reduce the price they are
willing to pay, or make a portion of the price contingent upon the
business's future performance.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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