Why Prospective Business Buyers Should Love Flat Revenue

 

Perhaps “love” is a strong word. Perhaps “not be put off by” is more appropriate. Flat revenue refers to a chart’s depiction of the historical trend of a business’s revenue – flat revenue means that the trend line is nearly horizontal, stagnant, … flat. Some prospective buyers immediately move on to the next business to be considered when they see a flat revenue trend.

 
Flat Revenue.PNG

Flat Revenue?

It actually might indicate a GREAT opportunity for growth potential under a new owner....

 

Why do I say that flat revenue deserves further investigation? Many times, revenue is flat simply because the owner has rationally chosen to avoid the expense, effort, and headache associated with growing the top line. Many small businesses are built to the point of satisfying the owner’s lifestyle, and once that goal has been satisfied, the barriers to moving beyond are too great. Maybe it’s learning about “all that SEO stuff,” maybe it’s the risk of conceiving a new product line, maybe it’s knowing that staff will need to be hired – for myriad reasons, the perceived payoff just isn’t worth it. And, there’s nothing wrong with that. After all, the owner is the owner.

But for a buyer, a business with flat revenue can represent a great opportunity. Maybe there are marketing channels that haven’t been explored. Maybe there are complementary products or services that could be offered. Maybe it’s simply having a willingness to commit more energy and effort to growth.

We often see this last idea bear fruit early on. One of my relatives bought a flat-revenue, simple service business about a year ago. Before doing so, I assisted her by doing a purchase price justification using a discounted cash flow model (I know … geek!). It showed that the seller had priced the business based primarily on a rear-view look, which is not uncommon, and that by growing revenue by just 3% per year, the present value of the business was more than the owner was asking. The buyer also had specific ideas about how she could grow by much more in the first few years after taking ownership. She scooped up that business, and after nearly a year, she is ahead of the former owner by 8%. Over the last six months, she’s ahead by more than 15%. How did she do it? Energy. Enthusiasm. Evidence-based decisions. Price increases. Pruning unprofitable customers. Firing. Hiring. Pay increases for staff. Embracing new marketing ideas. Learning “all that SEO stuff.”

Be aware that careless use of the discounted cash flow model mentioned above (one of the methods comprising the Income Approach for valuation) can lead one to an unrealistic expectation of value. Still, the Income Approach is arguably the best method for the valuation of businesses above a certain size, and certainly those with explainable growth prospects. In my practice, I will often help clients realize the benefit of having a professional valuation performed that uses the Income Approach.

I’m not saying that all businesses with flat revenue are great. I know of one auto-aftermarket business that had tapped its building’s capacity to service more customers. The owner had already incorporated round-the-clock shifts and optimized the floor plan. That firm simply could not expand without adding additional physical area, an expensive undertaking.

Still, when considering a flat-revenue business for purchase, take the time to do your own assessment of growth potential. Has the growth flattened just to serve the owner? Do you have specific ideas that will drive revenue up, or expenses down? Perform your own line-by-line analysis and calculation to determine what the business is worth to you. Yes, it can be a lot of work, but the potential reward can often be well worth the effort

-Ken Whitley, Business Broker at Murphy Business