Why You Need to Know Your Profitability by Revenue Source

By Generational Equity


Last week we examined a key step in the Generational Equity business evaluation process: The analysis of each client’s financial ratios in relation to published industry norms. The importance of this step was outlined, as well as the need to create solid strategic recommendations to shore up any ratios that are not meeting industry standards in order to give buyers a higher comfort level with your company’s operations.

Now we will take this analysis a step further and cover a second key component of our financial analysis: looking at a company's profitability by revenue source.

Why does this matter to buyers? I mean if my EBITDA margin (earnings before interest, taxes, depreciation and amortization) is 15% and the industry norm is 10%, why does it matter per source?

Profitability by revenue source matters plenty from a buyer’s perspective for two reasons:

  1. It can indicate if you are “buying” revenue from a specific client at the expense of the bottom line, or
  2. It can show a potential for profitability improvement if key customers can produce gradual price increases.

More often than not, we encounter business owners that have rarely, if ever, done a profit margin analysis by revenue source based on their clients, product line or both. In fact, quite a few clients that I meet post-deal close for our testimonial interviews tell me that the financial analysis we conducted on their businesses, especially when we looked at where the profits are coming from, was enlightening and even beneficial in helping them run their business better:

I bet that if you took the time as we do during our business evaluation to analyze your margins by client and/or product line (or both), you will be amazed to learn that you may have some tremendous upside in your business if you were to better manage your pricing guidelines, especially with larger clients.

Of course, one of the benefits of hiring an M&A firm like the Generational Group is that we do this analysis for you in order to help you prepare the business for buyer scrutiny. It is possible to do the analysis of your ratio and profit margins on your own with the help of your accountant; however, the real benefit of working with our team is that not only are they extremely talented and experienced in this analysis, they also can provide strategic ideas on how to improve your operations/pricing so that buyers will be more attracted to your business. And that is the real key advantage we provide to our clients: we have worked with buyers for decades and we know what they are looking for, what issues cause them concern, and how to help business owners overcome them.

If you are interested in beginning the process of building your business to be buyer ready, you should attend a Generational Group executive exit planning conference. We hold these frequently throughout North America and business owners who attend tell us that they are much better equipped to create true value in their businesses:

For more information, use the following links:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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