Most founders aim to boost sales, but prioritizing top-line growth can lead you to pursue low-quality revenue, potentially reducing your company’s value.
To an acquirer, revenue quality varies. They prioritize future revenue predictability, valuing recurring income from contracts and subscriptions higher than one-off sales.
Consequently, businesses with recurring revenue often command a revenue-based valuation. In contrast, businesses reliant on transactional revenue are usually valued based on a multiple of EBITDA – earnings before interest, taxes, and depreciation.
Below is an excellent example of an owner who clearly understood his endgame and had the fortitude to pursue the goals required to drive the recurring revenue needed to maximize the company's value. Not only did the team have a solid strategy, but they also had the discipline and alignment to stick to it.
Why Would Anyone Turn Google Down?
Mike Winnet started U.K.-based Learning Heroes after recognizing that most e-learning programs were long and boring. He saw an opportunity to transform the industry by selling large companies a subscription to his short, engaging, animated training courses.
Although his company was growing, it was still thirsty for cash. Winnet was drawing a salary of just £500 a month when he received a lucrative offer from Google. They offered him £90,000 to create a custom course. The course would have taken his team just three months to develop, and Winnet would have welcomed the injection of cash.
But Google’s offer was a one-time transaction and didn’t sit right with Winnet, who was trying to build a company based on recurring revenue. “I know loads of people who would have taken that £90,000 contract, but we didn’t because it didn’t fit the model. We used to have a sign on the wall that said, ’Does It Make the Boat Go Faster?’ and if the decision didn’t make the boat go faster, we wouldn’t do it.”
Not only was Winnet concerned Google’s offer would slow their journey to becoming a subscription-based e-learning juggernaut, but he also knew the one-off nature of the revenue could undermine the value of his company in the eyes of potential acquirers.
Winnet started Learning Heroes with the intent of selling it within three years for £10 million. He knew he would need to position the company as a product-based subscription business to garner such a premium offer.
A simple service company doing one-off projects, like the one Google was offering, would be lucky to garner an offer of one times revenue. In contrast, a subscription-based product company could command a much higher valuation from an acquirer.
Winnet’s discipline paid off when he accepted Litmos's £8 million acquisition offer, roughly four times his revenue at the time.
Had he been viewed by an acquirer as a traditional service company, he would have likely been offered a quarter of what he received.
The Lesson:
Rather than focusing exclusively on revenue growth as a goal, owners that sell for the highest multiples tend to concentrate on growing value, even if that occasionally comes at the expense of short-term sales.
It’s not unusual for business owners to lose sight of the endgame, especially during times of substantial growth. One of the first things I work on with my clients is to get clarity on their vision for the company and what drives their passion for it. When you permit yourself to focus, your decisions about what to invest in, who to hire, and your ideal client become much easier, and you can move ahead with much more velocity.
Have you considered the transformative power of picturing your endgame? Download this valuable eBook to learn about creating a roadmap for the next stage of your entrepreneurial journey.
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