The 3 Types of Revenue You Need To Understand In Order to Sell Your Business
When a potential investor or buyer looks at your company, a key factor will be your current and potential income.
3 Types of Revenue You Need to Understand: Past + Present + Future
The best thing you can do for yourself is have total clarity around your revenue – past, present, and future.
You want to be able to clearly demonstrate and communicate your line of sight into the future opportunities your business has to maintain current success and grow into the future.
This requires a level of analysis beyond just a P&L, because it’s crucial for you to identify three different types of revenue:
Backlog
Pipeline
Go Get Revenue
Let’s break each one down in a bit more detail.
Backlog
Simply put, this is the work that you have already won, but not yet completed. It’s revenue that is guaranteed (as much as anything can be in this world), but it can’t be recognized yet as your company has not finished the work, delivered the service, or started on the project. It’s the work that you have a contractual obligation to finish and can reasonably expect to be paid for.
A few examples:
You are a general contractor working on residential homes, and you have a signed contract for a job that’s expected to start in June, but it’s currently March.
You run a cleaning services business, and one of your clients has a monthly contract with you to clean their office building for the foreseeable future.
Maybe you sell a good and have done a pre-order run of your next big product, which you have collected revenue from, but cannot recognize that revenue until delivery.
Pipeline
Sales Pipeline or Dashboard in a CRM system
A company’s pipeline refers to the potential revenue that will be generated IF you close the deals you are currently pursuing. This isn’t wishful thinking, this is business that you can reasonably expect to close a certain percentage of.
This is something that all companies should track through a CRM tool in order to have a view of all their opportunities.
Within your pipeline, you may have a variety of stages that each opportunity is at, and it’s vital to have a defined understanding of what each stage means for your business.
For example, many companies use the terms “leads”, “deals”, and “opportunities” interchangeably. That’s fine. However, within your company pipeline, there should be a consistent definition for each.
A company’s CRM tool should outline the full prospect journey through the stages that are necessary to move them to a “won” deal. Typically, they start as a lead and move through a process that shows if they’ve had an initial meeting with you, received a quote, or even verbally committed to working with you. All of these stages are specific to your business and can then be weighted based on the revenue available for where they’re at in the journey.
For instance, maybe you know that 50% of your prospects who receive a quote from you end up becoming customers. Or you know that you can conservatively assume your sales team will close 20% of their current open opportunities. That's a weighted average you can set to all the deals currently at that stage to know the estimated value of your pipeline.
Go Get Revenue
“Go get revenue” is in the future - what does that picture look like & can you estimate what’s to come?
As a company, you likely have a goal in mind for the amount of revenue you want to generate in a given year. This revenue is the difference between your goal amount, the work you’ve already done, and the work you’re contracted to do in your backlog, and the work you can expect to do through your pipeline.
Go Get Revenue = Goal Revenue - (Billed Work + Backlog + % of Pipeline)
Or, put another way:
(Completed work + Contracted work + a % of pipeline) + Go Get Revenue = Goal Revenue
If you have a sales team in place, this is the revenue that they need to drum up to help your company reach its overall goal.
This could be found through increasing the market share of the company by seeking out new customers in the fields that you actively service. You could also increase the wallet share you have with your current customer base, which can be done by outlining the opportunities you have to cross-sell additional products or services to those who are already buying from you.
To Summarize:
Backlog = work that is contracted to happen
Pipeline = work that could happen
Go Get Revenue = work that needs to happen to reach your goal
Why do I need to have all of these organized to sell my business?
Because you need to show not just what you’ve billed in a particular quarter or year to date, but what you expect to generate in the coming months and years.
From our experience, your potential revenue and your capacity for growth are going to be a consistent question throughout the sales process. There will be a lot of focus on your pipeline, backlog, and go-get revenue.
Being able to understand these numbers well allows you to tell the story of your business and where it’s going.
A strong pipeline excites a buyer because it shows them where they can immediately invest their time to grow the company.
This is a step in your preparation for sale that you cannot afford to skip.
We exist to serve business owners like you better track these items in preparation for a potential sale. Whether you’re currently thinking about your exit, if you want to be proactive about being prepared for the possibility of selling in the future, or even if you'd like to enjoy running your business more right now, we’d love the chance to talk more about it with you.