Two businesses.
Same industry.
Same revenue.
Completely different value.
This is one of the most important concepts for owners to understand when thinking about an eventual exit.
Let’s look at two fictional electrical businesses.
Both generate $2 million per year in revenue.
On the surface, they look almost identical.
They’re not.
Business A
Revenue: $2 million.
Adjusted earnings: $180,000.
The owner quotes most jobs.
The owner manages the employees.
The owner holds the relationships with the largest customers.
One customer represents 45% of revenue.
Most work is one-off projects.
There is limited documented pipeline.
Financial reporting is basic.
The business is profitable and provides the owner with a living.
But a buyer sees considerable risk.
If the owner leaves, what happens?
Business B
Revenue: $2 million.
Adjusted earnings: $400,000.
A supervisor manages field staff.
An estimator handles most quoting.
Administration is handled internally.
No customer represents more than 12% of revenue.
The company has recurring commercial maintenance contracts.
There is nine months of confirmed work.
The owner primarily focuses on strategy and relationships.
Monthly management accounts clearly show performance.
Same $2 million revenue.
Completely different company.
Now Apply the Multiple
Let’s use simplified hypothetical multiples purely to demonstrate the concept.
Business A:
$180,000 × 2.5 = $450,000
Business B:
$400,000 × 4 = $1.6 million
Same revenue.
But in this simplified example, there’s more than $1 million difference in indicative value.
Why?
Business B produces more profit and carries less perceived risk.
Revenue Can Hide Problems
Owners naturally talk about turnover.
“We’re a $5 million company.”
That’s useful information.
But buyers want to know what happens after the $5 million comes through the door.
How much remains?
How sustainable is it?
How much working capital is required?
How much equipment is needed?
How dependent is revenue on particular customers?
How difficult is the company to operate?
How much reinvestment is required?
A business generating $10 million in revenue and $300,000 in profit isn’t automatically worth more than one generating $4 million and $800,000.
The Goal Isn’t Just Growth
Growing revenue can be exciting.
But growth without profitability, systems and infrastructure can simply create a bigger headache.
Instead of asking only:
“How do we get from $5 million to $10 million?”
Consider asking:
“How do we make this $5 million company more profitable, predictable and transferable?”
Sometimes that creates significantly more shareholder value.
Build for Quality, Not Just Size
Revenue is important.
But don’t let it become the scoreboard for your entire company.
A quality business has:
Strong maintainable earnings.
Good management.
Diversified customers.
Repeatable systems.
Recurring or predictable revenue.
Healthy margins.
Reliable employees.
Clean reporting.
A strong future pipeline.
And limited reliance on one person.
Because when it eventually comes time to sell, buyers aren’t purchasing your historical revenue figure.
They’re purchasing the future cash flow they believe the business can produce after you’ve gone.