Your growth rate is hiding something

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Revenue is presented as a measure of size. A buyer reads it as a collection of risks: how much of it repeats, how much has to be won again every year, how much sits with three customers, and how much of the pipeline has ever actually converted. The top line answers none of it.

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Two businesses each grow from $10 million to $12 million in a year. In the sale document, both report 20 per cent growth, and most owners would be pleased to show it.

Underneath, they’re nothing alike. The first kept almost every customer it had and won $2 million of new sales on top. The second lost $4 million of revenue from customers it already had, and had to win $6 million of new sales to make up the loss and still finish $2 million ahead. Same start, same finish, same growth rate. A buyer won’t pay the same for them.

What the growth rate leaves out

The second business has to replace 40 per cent of last year’s revenue before it can grow at all. Its sales team is running to stand still. If new sales dry up for a year, the first business holds its ground. The second shrinks by $4 million.

That’s what a buyer is looking for underneath the top line: where the revenue comes from, how often it repeats, how easily the customer can leave, how profitable it is, and how much effort it would take to replace. A growth rate tells you none of that, and a good one can hide all of it.

Follow the customers you won three years ago

The clearest way to see it is to follow a group of customers over time. Take the ones you won three years ago. Work out how many are still buying, what they spent in their first year, and what they spend now. Then sort them into the ones who expanded, the ones who contracted, and the ones who left, and find out why. Do the same for other years, channels, or kinds of customer where the data allows it.

Patterns appear. You might find that customers who came through referrals stay twice as long as those who came through paid advertising. That one service produces excellent first-year revenue and poor retention. That customers become much more profitable after their second year. That most of the people who leave do it in the first six months, because onboarding is weak.

Any business can do this, in its own language. A construction company might count repeat clients; a food manufacturer, the accounts that keep reordering. Use measures that fit the business. The principle is the same everywhere: whether customers keep buying, and what happens to their value over time. A buyer who can see that you understand what drives your customer economics will trust the rest of your growth story more.

Revenue that recurs, and revenue that happens to recur

Recurring revenue attracts buyers because predictability has value. The phrase is also abused.

Some revenue is contractually recurring: a subscription renews, a maintenance agreement continues, a customer is committed for a set term. Some is behaviourally recurring: there’s no commitment, but the customer has bought every month for eight years. And some is simply the business winning similar work again and again. Those are different things, and folding them into one impressive percentage invites the obvious challenge. Claim that 80 per cent of your revenue is recurring, and the buyer will ask what you mean by recurring.

Show the split instead: how much is contracted, how much is subscription, how much comes from repeat customers with no commitment, how much has to be resold every year, how much is project work, and how much is really one-off. Then show the history, because behaviour can beat paperwork. A customer with no long-term contract who has ordered steadily for 10 years may be very attractive revenue. A 12-month contract that’s easy to cancel and rarely renewed may be worth less than the word “contracted” suggests.

The aim is accuracy. If a buyer decides you’ve stretched a definition to flatter the revenue, you’ve created a credibility problem over revenue that might have been attractive anyway.

Same revenue, different businesses

Two companies can each turn over $25 million and deserve very different prices. One has hundreds of customers, strong repeat buying, low churn, and no customer above 3 per cent of sales. The other earns half its revenue from three customers whose contracts expire next year. The top line doesn’t tell you which is which.

Segment your revenue the way a buyer will: by customer, product, service, location, channel, and contract type, with gross profit alongside. A $2 million customer with thin margins, heavy working capital needs, and a habit of taking up management time can be worth a good deal less than its revenue suggests.

A large customer can be made to look smaller by billing its divisions or group companies separately, so no single name tops the list. Presented to a buyer or investor that way, it’s misleading, and their due diligence will add the accounts straight back together. Once they’ve found one number dressed up, they’ll question all the others, and that can do the deal far more damage than the concentration itself. Where concentration is real, splitting one customer across several accounting codes won’t fix it. Only reducing the dependency will, and that can take several years, which is one more reason to start early. In the meantime, build the evidence around the relationship: how long the contract runs, how it has renewed, how satisfied the customer is, how many people know each other on both sides, how much the customer depends on you, and what it would cost them to switch. That evidence gives a buyer something better than your confidence to judge the relationship by.

A pipeline a buyer can model

Pipeline is one of the easiest numbers in a business to inflate. Suppose the CRM shows $30 million of opportunities. Some are well advanced. Some are early conversations or requests for information. Some have been sitting there for 18 months. Some are opportunities the customer doesn’t yet know they’re part of.

A sophisticated buyer won’t accept the total. They’ll look at how the pipeline has converted in the past: what share of opportunities at each stage actually closes, how long they take, the average deal size, how often expected close dates get moved, and how much of it depends on one salesperson. With disciplined definitions and the history behind them, you can say something a buyer can use: opportunities that reach a particular stage have historically converted at 62 per cent, with an average sales cycle of 90 days. Now they can model it. A $30 million pipeline without that context is just a large number.

You can only quote a conversion rate like that if your CRM has been kept as a record of what actually happened. Treat your CRM as evidence rather than administration. Dead opportunities get closed. Close dates don’t roll forward forever. Stages mean something, and the probabilities bear some relation to what has actually converted. Customer records are complete enough that someone other than the salesperson can understand the relationship, and the important conversations don’t live only in somebody’s personal inbox. If your salespeople update the system on Friday afternoons because they’re told to, the data will tell a buyer considerably less.

Don’t build a pipeline for the sale. If the data turns immaculate three months before you go to market, buyers notice. Build the discipline while you’re still running the business for yourself.

If you’re raising money rather than selling, an investor reads your growth rate the same way. They’re funding the next customers, and they’ll want to know whether the last ones stayed.

If you are the buyer here: ask for revenue from existing customers and revenue from new customers as separate lines, for each of the last three years. Then ask for the stage-by-stage conversion behind the pipeline before you look at its total.

What to do this week

Split last year’s revenue into two lines: what came from customers who were already buying from you the year before, and what came from customers who were new. Then do the same for the two years before that.

Then look at the first line on its own, the revenue from customers you already had. If it’s shrinking each year while the total keeps growing, new sales are covering for the customers you’re losing. That’s what your growth rate is hiding, and it’s better that you find it than a buyer does. If that line is steady or growing, your customers are staying, and that’s the first thing to show a buyer.

The full revenue review, from what counts as recurring to a pipeline a buyer can model, is in Amplifying Market Presence and Growth Potential, free to download from the Download Vault: manolutions.com/downloads.