The single largest determinant of the price at which a business sells is its revenue, both past and future. Buyers pay for positive cash flows and operating revenue is the first and largest component of cash flow. In those cases where certain revenue streams generate losses, they will actually detract from value. But in general, buyers overwhelmingly prefer strong revenue with subpar cost structure over weak revenue with bad margins; it’s harder to boost sales than to cut costs. Being able to logically explain historic revenue behavior and why that pattern will continue or change is required to convincingly project revenue in future years.
A seller must analyze its distinct lines of business and show how each stream was managed to accomplish the track record of the past 5 years:
- Separate product revenue from service revenue (e.g., new unit sales v. overhauls); divide revenue by customer type (e.g., military v. commercial), industry segment (e.g., passenger v. freight) and program (e.g., 737 v. F15).
- Analyze the industry dynamics of each revenue category (e.g.: global demand, competition changes, technology breakthroughs, regulatory impacts).
- Opine on the future of each revenue category and how it will affect current or planned product and service offerings.
Be sure to rely on solid data and sound analyses as the foundation of a revenue study. When suggesting correlation, use extra caution to avoid the appearance of confusing causation with coincidence.
Once a credible analysis of past revenue categories is complete, incorporate it with a carefully considered strategic plan to produce robust revenue projections. Explain how each element of revenue will be impacted by individual factors (global economy, competitive, regulatory, technology). Cite third party sources that support your industry predictions. Employ data-based formulas to derive your revenue forecast.
Proper and thorough use of revenue analytics will result in convincing projections that will stand up to intense scrutiny during buyers’ due diligence. The end result will be a higher price for the business.
Have a great day everyone.
Managing Director, Aerospace