When business owners talk about growth, they usually talk numbers. But what if your revenue – the very thing you’re chasing – is actually making your business harder to sell?
In this episode of the Exit Insights podcast, Kevin Harrington joins Darryl Bates-Brownsword to explore one of the most misunderstood intangible assets: revenue. Not just how much you make, but how you make it.
Read more: Why Not All Revenue Is Equal: What Buyers Really Want with Kevin Harrington???? Why This Matters
When preparing for exit, buyers don’t just look at your P&L. They want to know:
- Is this revenue going to stick around?
- What risks come with it?
- Is it built on solid, ethical ground?
Too many businesses suffer from “bad revenue” – income that’s dependent on a few key customers, reliant on the owner’s involvement, or only earned through one-off deals.
???? Key Insights
- Structure is everything: Subscription and contracted income boost business valuation far more than sporadic, one-off sales.
- Customer concentration is risky: If 30%+ of your revenue comes from one client, you’re vulnerable.
- Ethical alignment matters: Your team – and potential buyers – care who you do business with.
- Owner involvement hurts value: Revenue should flow regardless of who’s in charge.
???? Actionable Tips
- Audit your revenue streams – how predictable and secure are they?
- Look at who your biggest customers are – would losing one kill your business?
- Start shifting from profit-thinking to valuation-thinking.
- Make sure your contracts with customers and suppliers are aligned in length and power.
A truly exit-ready business doesn’t just earn – it earns well, consistently, and without leaning on any one person.
Transcript
Darryl Bates-Brownsword (00:00)
Welcome to the podcast that’s dedicated to helping business owners maximize the valuation of their business so that you can exit on your terms when you’re ready to exit. This is the Exit Insights podcast presented to you by Fabric. I’m Darryl Bates-Brownsword and I’m joined today with my partner ⁓ in business partner there, Kevin Harrington. Thanks for joining me today.
Kevin Harrington (00:21)
Hi, Darryl, it’s good to be back. And I think we’re continuing talking about assets that don’t show on balance sheets, aren’t we?
Darryl Bates-Brownsword (00:31)
commonly or what we refer to as intangible assets. How do you boost the valuation and therefore, and boost the professionalization of your business by ⁓ thinking about and consciously working on your intangible assets? And there’s a few there that we’ve got in a little framework that we use as a bit of a list or a checklist. So we started with positioning in the last podcast. ⁓ let’s talk about the revenue today. ⁓
Revenue in itself shows up on your balance sheet and your P &L, but revenue as a product or how we charge clients for what we do, how do we think of that as an intangible asset?
Kevin Harrington (01:17)
It’s a bit like the positioning, isn’t it? You talk about trying to position your business, it’s the quality of how you position it. And so here again, it’s a quality issue that is probably the overarching thing we’re talking about. What is the quality of your revenue? So at its absolute simplest, if all one did was focus on the profitability of the revenue, that’s a grand start. And that’s usually where people do start, isn’t it? They go, I’ve sold 100,000 pounds worth
in the last month, and I’ve made 25 % gross profit and I’ve made 5 % net profit. And so the value of the revenue is that net profit. And their ambition is to make that net profit higher. And that’s a quality of revenue thing. But what we need to talk about is some of the longer term risks and the positioning of that revenue, it fits in with our business ambition and our
values I guess as well
Darryl Bates-Brownsword (02:18)
Yeah, and it’s interesting because one of the things we do talk about when we’re working with clients is that, first thing, we need to get them thinking about the profitability and evolve their business development thinking from revenue thinking to profit thinking. And then when we want to start to professionalize their business and really look at how do we maximize the valuation, we need to get them thinking about regularly assessing or ⁓ assessing the valuation of their business. So we want that.
that shift in mindset to evolve to valuation thinking, which is a really good starting point. revenue, so if we’re gonna start thinking about valuation thinking and looking at the revenue, how do we look at the revenue from a valuation thinking perspective? So we need to have a look at it and go, what’s the risk of our revenue or the nature of our revenue changing?
What’s the risk of it changing with a transfer of leadership or a transfer of ownership? And that’s kind of our key criteria for how or lens for how we’re looking at the revenue structure or the quality of revenue as you’ve put it in the business. So let’s dig into that, shall we?
Kevin Harrington (03:29)
Yeah. Yeah, it’s
interesting. If you sit down with your bank manager, they’ve got more luscious titles these days and pure bank managers, haven’t they? if you sit down with your bank manager to look at banking facilities and credit lines and so forth, it’s the type of revenue matters to them as well. we really thinking of it from that pure asset value growth and development that you
that would benefit exiting your business. If someone’s gonna come along and buy it, what would they look for? And sometimes it does sit on top of what the bank manager wants to see. So I was working with a tech business that had three or four different business offerings. And one of them was a straightforward, you just say, want one of those please and you buy it. And another one was a subscription business. And so people subscribed and they could cancel at some point.
And another chunk of it was contracted business. And of course, the difference between those is absolutely enormous. If there’s a bit of a downturn, you get early indicators with long-term contracted business in that if everyone’s renewing annually, for example, let’s say it is 1 12th your business gets renewed every month. If that slows down a bit, it’s giving an early warning about the rest of your business.
Darryl Bates-Brownsword (04:56)
Hmm.
Kevin Harrington (04:57)
Clearly, if you’ve got contracted business, if that’s on a moving annual total basis, if that’s increasing, that’s making the business look much more secure. ⁓ And to a lesser extent, but still very valuable is this constantly renewing subscription type business. That’s worth a lot as well. Where you’re at risk is if no one has to buy anything more from you tomorrow or pay you any more money, your income this month might look fantastic.
but how hard do you have to run to get it next month? And is the market biting for what you want?
Darryl Bates-Brownsword (05:30)
Yeah.
And two out of three of those pass the test of, you know, will it change under a transfer of leadership or ownership? ⁓ And one doesn’t. And that’s the subscription and the contracted. Now, sure, we’ve got to check the terms of the contract and what have you, but they will continue under a transfer. ⁓ The one-offs, all the purchases that are one-off purchases, they may or may not continue depending on who’s doing the sales in your business.
So that’s what we want to look at. it down to the ownership or the senior leadership team who are making all those sales and have all of the relationships with the prospects ⁓ and the potential sales leading up in their pipeline? Are all of those down to the key people in the business, the shareholders, or are they delegated down to different people in the business, depending on the size of the business? So there’s one of the first things you want to look at is, is what’s your involvement as an owner?
How much of those sales are dependent on you being involved in an operational role, you know, being your activity or your relationships?
Kevin Harrington (06:39)
Yeah, absolutely. So we’re off and running now. That’s a very important thing to look at. I know some people that fixate on the ratios of their revenue from those different types of contracts. And that’s probably a bit over the top once you get going. And it’s something I would be tracking monthly.
Darryl Bates-Brownsword (06:42)
you
Kevin Harrington (07:03)
just to get a sense whether there’s a change going on and trying to set some sort of ambition about moving some people that are out of contract or not never been in a contract with you into giving them some way to nudge into it. If you’re given them more, make them contract for longer, that type of thing. I hate to compare this concept to mobile telephony businesses because well, you know what I think about them, Darrell.
Darryl Bates-Brownsword (07:20)
Yeah.
personal favorite not
Kevin Harrington (07:31)
I did spend an hour on the phone on Friday to one of those illustrious companies ⁓ and achieved virtually nothing in an hour, but there we go.
Darryl Bates-Brownsword (07:41)
Was that an hour on hold just trying to speak to a human?
Kevin Harrington (07:44)
25 minutes for speaking to a human who, yeah. Anyway, it’s, they’re now trying to lock you in on two years, don’t they? And we reluctantly take it because we have no choice because it’s almost monopolistic. And if we’re
Darryl Bates-Brownsword (07:57)
Yeah. So
that’s a really good example of who has the power in the relationship, the buyer or the seller. And as a consumer there, you’ve got as the customer, you’ve got no power in that relationship.
Kevin Harrington (08:02)
Mmm.
absolutely none. It’s almost monopolistic in its structure. And really, mean, at least from my point of view, and I know from yours, Daryl, if you’ve got a situation where people feel hijacked into having to deal with you, that’s, for me, that’s an imbalance that shouldn’t happen. It’s morally not right in business, I don’t think, to have people in that situation. Sometimes it’s illegal, but…
Darryl Bates-Brownsword (08:34)
Yeah.
Kevin Harrington (08:38)
Why do we have to have laws for those things? Why can’t we run our businesses in ethical and moral ways where we benefit and our clients benefit? And the same goes back to our suppliers. So we’re talking about the sustainability of these revenues, the quality of the revenue. So let’s imagine we have our customers who happily have an evenly balanced contract between us and them, and they’re contracted for a year or two years or three years, whatever it might be.
But on our supplier end, they’re making us contract for longer for us to get the deal we need or whatever. Suddenly we’ve got this problem that if our contracted customer expires their contract in a year’s time, we’ve still got an obligation to our supplier. So these things leap out when you start thinking about them, but quite often businesses get themselves into these models without necessarily realizing it.
Darryl Bates-Brownsword (09:17)
Or just ideal.
Kevin Harrington (09:37)
your procurement have done a good job buying the best getting it at the best price. But the demand end of it, we can’t guarantee the demand ends going to keep up with the supplier pressure we’re getting. And so it’s a quality.
Darryl Bates-Brownsword (09:49)
So you
need those two, the buyer power and the supplier power, so to speak, in balance. So you’re not locking into having to buy a wholesale product for two, three, four, five years, but you’re only able to lock your customers in for one or two years. You’re saying that’s out of balance and therefore the quality of revenue is at risk and ⁓ that’s not gonna be good for the valuation.
Kevin Harrington (10:14)
Yeah, it’s not good for running a business day to day. And generally things aren’t good for your business day to day, definitely not good for valuation. But sometimes it can appear perfectly okay when you’re trundling along course by quarter, it’s all okay. But you’re running with a risk that could flatten your business. And the government gets themselves into these situations with long term contracts on things that then they suddenly feel they need to be out of them, then they have to pay out the contracts.
Darryl Bates-Brownsword (10:17)
you
Kevin Harrington (10:44)
and they didn’t consider what would happen at the end of it. So this is the quality of the balancing of the contracts, isn’t it? And the supply and the demand bit. If you’ve got no guaranteed demand, don’t want to be forcing yourself to be buying stuff.
Darryl Bates-Brownsword (11:02)
Yeah. Okay. So we’ve got the, we’re talking about the quality of the revenue and, how, how does the revenue arrive at the balance sheet or the P and L and, and that’s what we’re talking about here in terms of balancing or, increasing the valuation of the business. So we, don’t want supplier or buyer power out of whack. We want it to be ethical. want, if we, if our customers love buying from us and therefore they keep renewing,
That’s a good thing. But if they feel locked in, you mentioned mobile phone contracts. I think energy suppliers are in the same boat. And yes, they’re both corporate as opposed to the SMEs and mid-market businesses we work with. how often, I don’t know about you, but I’d been with one mobile phone ⁓ provider for a number of years and I thought, you know what? They just keep putting the contract up. I feel locked in. I don’t like dealing with these guys. I’m gonna change. ⁓
And they’re all the same. You keep hearing that. I went from one of the big suppliers to another and treated the same. The network works, but the quality of the network is nowhere near as good as the one I switched from. Now, you talked about being locked in for two years. I am locked in. I hate them. I hate dealing with them. ⁓ What am I going to do at the end of that two years? I’m going straight back to that previous supplier.
Not because they’re a great supplier, it’s just that their network is better. So I can have calls when I’m in between villages and it’s just got a greater network. So at the end of the day, that’s what it would appear I’m interested in, is the quality of the product.
Kevin Harrington (12:42)
Yeah,
absolutely. one day people power, might all gang together and all exit from one of them and then they’ll start thinking differently.
Darryl Bates-Brownsword (12:52)
Yeah, well, who knows? Okay, so we’ve talked about ethical. So are we selling a product that really solves a problem for a client? Do they need the solution we’ve got? Is it the right solution? Are we selling it to the right people? Are we selling it to people who can afford and want and justify our product? ⁓ It’s a product that they want to need. So therefore there’s no buyer power, there’s no supplier overweight in power.
We’re selling it in a free and open market where everybody wants to participate and can freely and willingly participate or leave at any time. Yeah. From a pure financial perspective, you could, if you’ve got lock in, it looks great on the balance sheet. And theoretically shareholders love it from an ethical perspective, an SME perspective. If your customers love doing business with you, that’s a much better proposition.
Kevin Harrington (13:47)
Yeah, and you’re a consumer business, it’s the revenue with great reviews. That’s worth more than, that’s the evidence of you doing the things you’re talking about, I guess, being ethical and supplying things that people want. And we’re off and running if that’s the case. I think the ethics piece and the morality of the revenue is something we should dwell on for a minute. Now, are you dealing, is your business dealing with some organization that has
Darryl Bates-Brownsword (13:53)
Yeah.
Kevin Harrington (14:15)
ties with organizations that might be less than squeaky clean. You know, sometimes we should do reverse due diligence and we should look at who our customers are, especially if it’s a substantial part of our income. And I can think of a particular marketing agency that had a similar problem where they took on a, as it happens, a charity and they were helping that charity market themselves digitally and all that stuff.
And there was a minor rebellion amongst the staff of the supplying company because they disagreed with the charity’s positions on some things. And they said, well, a number of them said point blank, I’m not gonna work on that accounts. And I think if they hadn’t found a way of resolving it, I think they’d have lost key members of staff. now dealing with the wrong people, it’s guilt by association, isn’t it?
If you deal with people that have the wrong position themselves, if you willingly do business with them and help them be more successful, you not saying you’ve got the same values as them?
Darryl Bates-Brownsword (15:13)
Yeah.
That’s really interesting point because 40 or 50 years ago, I guess, ⁓ back in the damn dim old dark ages, we were, know, people were just a commodity. They were just a resource. Your human resources were just that. They were a resource ⁓ and they were employed by you and they did as they were told. And they had no power in the relationship.
Now we’ve, know, the economy has evolved and the marketplace has evolved. We’ve got, it’s a lot more service oriented, it’s knowledge based businesses. We recognize that the people are part of, you know, our most important assets and we often refer to them as the talent. So the talent have a lot more say or power, you know, to continue the thread that we’ve been talking in this conversation.
have a lot more power in the overall equation. So we need to listen to them and take their views on as part of our strategy and leverage their views because it’s that whole cultural piece which we’ll talk about in another podcast, but it’s getting the right culture as a ⁓ driving force in our business.
Kevin Harrington (16:37)
Yeah, we should be able to talk about our customers business to all of our colleagues in our business and them to think we’re doing great work in the marketplace. it’s mean, it started being observed ⁓ quite a while ago now with with Gen Y Gen Z. And talking about how so well, a significant percentage of those people coming into the workplace were
Darryl Bates-Brownsword (16:47)
That’s good. Yeah.
Kevin Harrington (17:04)
effectively interviewing their employer and wanting wanting to know yes, it was a good place and you are going to earn money and so on but wanting to know that it was a job worth doing and it was making a difference in to their standards. So if you’ve got revenue that’s coming in from customers that are doing great things in technology, healthcare, no matter what sector it is, if you can demonstrate that to to people internally, you’ll get
Darryl Bates-Brownsword (17:08)
Mmm.
Kevin Harrington (17:33)
better choice of staff, you’ll probably get people that last longer with you. So in reality, it’s going to increase profitability. mean, staff turnover costs money. So it’s good quality revenues, all about the quality. often businesses are going, they’re chasing the revenue because they need it for this month, not worrying about the problems they’re creating or achieving next year. And it
Darryl Bates-Brownsword (17:45)
Yep.
Kevin Harrington (18:01)
this reverse due diligence of inspecting who you’re selling things to is not that difficult. And occasionally we should learn to say no, that’s not the right business for us.
Darryl Bates-Brownsword (18:01)
Hmm.
Yeah.
Yeah. So where do we got to? So power has been a theme that has come up in this conversation a fair bit. So we don’t want customers have overweight, you too much power. We don’t want suppliers to have too much power. We need to have it all in check. And we don’t want staff and our talent to have too much power and be telling the leadership and the management. We need them all aligned.
to, and I guess this comes to having a clear leadership, having the vision and the purpose and going, this is why we’re in business. This is the problem we’re solving. This is who we’re solving the problem for. And we want all of those, those customers, the talent, the suppliers, all to be aligned to that vision and purpose that we’re in business. Yeah.
Kevin Harrington (18:54)
Yes, I’d add to that, Daryl, you said you talked
about the employees, you talked about suppliers, you talked about clients, we don’t want to have too much power either. Blunt power is from a positioning point of view, a bit disastrous, because you have to keep applying it. And if we get everything else balanced, we don’t go around exercising power, we don’t need to, because people, we’re influencing people to do things, that’s exciting.
Darryl Bates-Brownsword (19:14)
Yeah.
Kevin Harrington (19:22)
but there’s a natural flow of energy from one end of the supply chain to the other. And everyone is feeling happy with the structure of the arrangements, the contracts, the deals on the way. And so everyone’s revenue in our ecosphere is becoming better quality.
Darryl Bates-Brownsword (19:42)
Yeah, so the shareholders as well, guess the owners, you everyone, everyone, everyone in the relationship needs to feel like it’s a fair deal. And then the business will flow, the energy will flow. And that’s the best way to get ongoing secure revenue and profitability to add to the valuation of the business.
Kevin Harrington (20:01)
Yeah, if
you have to attack the marketplace with a crowbar, you’ve probably got it wrong.
Darryl Bates-Brownsword (20:05)
Yeah. Hey, I’ve got another one that I think I need to add to the list and that is we don’t want any one of your customers to really maximize the valuation of your business. An obvious one is we’ve talked about customer power. One of the ways that that becomes a problem is if you’ve got too much revenue coming from one customer. If you’ve got one customer represents 20, 30, 40 % of your revenue, that’s a big red flag. And that’s one way that I guess the customer power
will start to show up and they will exert power and leverage on your business. And it’s a massive risk at exit.
Kevin Harrington (20:40)
And.
Yeah, if they are north of 30%, they’ve, using Lancaster theory, any business that’s worth more than 30 % of your revenue, they probably have a chance of materially changing what your business is. And that’s fascinating, isn’t it? Because all of a sudden, they’re not about to say, I’m gonna make you more profitable by, you can charge me more.
Darryl Bates-Brownsword (21:01)
Yeah. ⁓
Kevin Harrington (21:08)
they’re going to ask to pay less and you’re more and more dependent. So they become 40 % of your revenue on a lower profit. So you’re probably making as, eventually you end up making as much profit out of them at 40 % as you were at 30%. And they’ll carry on milking this until you’re out of business and they’ll take their business elsewhere and do the same thing again. Many retailers used to do that. It’s less prevalent these days, but many retailers would.
would force people, suppliers to become dependent on them and then start wringing their neck for discounts. It’s immoral. It’s a great short-term deal, but it’s not sustainable.
Darryl Bates-Brownsword (21:50)
Yeah. Yeah. And, and ⁓ a successful healthy marketplace is when, when the players in that marketplace want you to be successful. Because if you’re successful and making a profit and providing a good solution, then, then the more people you can provide that solution for the better, assuming it’s, it’s a good job. And that’s what I’m referring to in a healthy marketplace. Now that may be a bit naive, but that’s the concept that we’re working towards.
That’s the rule that we’re working towards. There’s always a bit of deviation and in reality, but that’s the model we’re aiming for. And that’s the best practice model in my experience from what I’ve seen.
Kevin Harrington (22:31)
Yeah, I’ve had a memory of ⁓ working for a business that would do a deal if it made a marginal profit. So technically it was making a loss, but because it contributed to the overall overhead to some degree, it was making a marginal profit. And when you start ending up at these very, unless you’ve got a very, very well organized finance team and product management team, ⁓
Darryl Bates-Brownsword (22:37)
you
Kevin Harrington (22:59)
these fine margins become really difficult and it’s the responsibility of our businesses to make a profit. Some economic theory folk say that is the sole purpose of a business is to make profit.
Darryl Bates-Brownsword (23:09)
Yeah.
When people say that’s the sole purpose, the business that’s run like that generally doesn’t have a sole.
Kevin Harrington (23:24)
Yeah, but that’s when it’s simplifying it down to one thing. And I do agree with you. And so it is fascinating, isn’t it? We started off here talking about revenue being in, how does that relate to intangible assets and revenue, we spend most of our time chasing it. We spend most of our time saying, do you know what, I’ve just landed that one, they’re going to pay next week. in fact, you know,
Darryl Bates-Brownsword (23:31)
Okay.
Mm-hmm.
Kevin Harrington (23:52)
I had to discount it 5%, but it’s great. Look, we’ve got that money coming in. And actually, what we’re uncovering in our conversation here is that many of those behaviors saying, yippee, I managed to quickly land that client are actually reducing the asset value or the perceived asset value of the business to a prospective purchaser. And also to my good old friend, the bank manager who might be looking at renewing covenants and stuff like that.
suddenly you can’t borrow more money and they call in the debt and things like that. this revenue piece is so much more exciting than just an amount of money on the daily takings.
Darryl Bates-Brownsword (24:34)
Yeah. So let’s pull it all together, shall we, Kevin? Where we’re going, how do we look at our revenue and the construct of our revenue of a business to go, how do we really build it and leverage it as an intangible asset in our business? How do we need to look at it rather than just the mechanics of it coming in, looking at it on a spreadsheet or a finance report? And we said, we need to look at the structure of the revenue. How was it made up? And we talked about whether it’s contract.
or one-off purchases or subscriptions. We talked about the quality of the revenue and how secure is the revenue. We talked about what’s the likelihood of that revenue changing under a change in leadership or ownership of the business. We said we don’t want any of the players in the market to have too much power, whether they be shareholders, customers, suppliers, or talent in the business. ⁓ We said we don’t want any customers to have too much
⁓ leveraged by being too big a component or representing too much of the revenue in our business. ⁓ And we said that we don’t want any of our shareholders ideally to be ⁓ involved at an operational level directly with relationships with people, with customers and suppliers to make sure that that revenue is dependent on them being involved on a daily basis.
pretty much what we covered or did I forget a couple of pieces?
Kevin Harrington (26:03)
Now you’ve
done a very fine summary. suppose the only thing we ought to just spend a couple of moments on is whose responsibility is it to make sure that revenue is the right revenue.
Darryl Bates-Brownsword (26:17)
If you’re asking me, in my view, I think it’s the founders to be going, hey, or the ultimate leaders of the business, typically at a board level to go, this is the direction the business is headed in. This is why it exists. Here’s the problem we solve for clients. Here’s the type of people or customers or clients we solve the problem for. Here’s our product strategy for how we solve that problem. And here’s how we charge our pricing and packaging for.
for solving that problem for clients. So to me, that’s a very strategic question and that is the responsibility of the board and the founders of the business.
Kevin Harrington (26:54)
Yeah,
and it shouldn’t be devolved below that. It’s the vision and the mission and the culture of the business that informs the strategy. And then all the revenue should be checked against that plan, that written down plan saying this is what we do and why we do it. If it doesn’t fit in with that, it needs a big discussion before you start taking that revenue.
Darryl Bates-Brownsword (27:09)
Yep.
Brilliant. Nice way to finish it off there, Kevin. As always, thanks for sharing your insights with me today.
Kevin Harrington (27:24)
It’s been a pleasure, Darryl. Talk soon.
Darryl Bates-Brownsword (27:26)
Cheers.