Quality of Revenue

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Now for today’s post 📖

I took a Twitter poll and you all decided on the first topic: Quality of Revenue. So here we are!

Quality of Revenue is a critical factor in determining a business's enterprise value, and from the my experience, it has three distinct characteristics that contribute to it being of high quality, I call them the 3 🅿️’s of Revenue Quality: predictability, peculiarity, and profitability.

Predictable, Peculiar, and Profitable.

Predictable

Predictability refers to revenue that comes in on a regular basis, such as monthly subscriptions or annual contracts. This type of revenue is incredibly valuable because it provides a predictable stream of income, which can help stabilize a business's financials and make it more attractive to investors.

Recurring revenue is the holy grail of business models. PE Firms love it. And if you’re looking for a big exit so you can lie on the beach and listen to Pushin’ P for the rest of your days, you better love it to.

Peculiar

Does your business have 1 customer? That isn’t peculiar. Does all of your revenue come via one channel i.e. Amazon or Etsy? That isn’t very peculiar either. You want multiple customers coming across disparate channels for maximized revenue quality.

This diversity is no different than sound financial advice. Spread out your investments (customers) over multiple industries (distribution channels) to prevent any concentrated risks.

I write this as we have a customer for one of our businesses that is ~30% of revenue. So I am not the prince of peculiarity here.

Profitable

Profitability refers to the margins on the revenue in question. This is pretty straightforward. If it is predictable and peculiar but not profitable, then it is just volunteer work. None of us reading this are working for free. If it doesn’t make dollars, in doesn’t make sense!

You need to push all 3 🅿️’s to achieve maximum value for your business. If you are searching for a business, think about how you can optimize all 3 🅿️’s under your ownership.

Stay classy,

Chris M

**My kicks recommendation of the week: SB Jordan 4’s 🔥**

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