Insights & Info

Insights > Why You Need to Know Your Profitability by Revenue Source

Why You Need to Know Your Profitability by Revenue Source

By Generational Equity

Revenue Sources

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.

© 2017 Generational Equity, LLC. All Rights Reserved.

Make an informed decision

The best decisions in life are informed decisions. We release educational business insights like this every week. Subscribe to make sure you don’t miss the latest news, views and analysis.

Success

Success, you have been added to our list.

We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”
Karen S. Williams, CFO, BW Manufacturing
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.
Michael J Polarek, President, Paragon Packaging
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!
Andy Graham, Vice President, Modern Heating & Plumbing
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.
Karen S. Williams, CFO, BW Manufacturing
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.
Michael J Polarek, President, Paragon Packaging
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.