The Business Behind the Revenue

Revenue is wonderfully easy to understand. A $10 million company is bigger than a $5 million company. If revenue grew 30% last year, something is clearly going right. Add margins and profitability and we have an even better picture of the business.

But there is something those numbers don’t tell us.

Imagine two companies generating exactly $10 million in revenue and $2 million in EBITDA.

The first gets a large share of its customers through paid acquisition. Its founder remains involved in most important sales. One customer represents 20% of revenue. The product is good but broadly comparable with competitors, and several important operating processes depend on knowledge held by individual employees.

The second company also generates $10 million and $2 million in EBITDA. But its customers renew predictably, no single account can materially damage the business by leaving, a meaningful share of demand comes directly through its brand and audience, and the management team operates independently. It has proprietary customer data, established institutional relationships and a clear position in its market.

Same revenue. Same EBITDA. Very different businesses.

The financial statements tell us what each company produced. They tell us much less about what each company has built underneath those numbers.

If Someone Bought the Company Tomorrow

There is a useful thought experiment I would run even if you have absolutely no intention of selling your business.

Imagine somebody acquires the company tomorrow.

What exactly have they bought?

I don’t mean the legal entity, employees or office. What sources of value actually transfer to the new owner?

• If the founder leaves, do the largest customers stay?
• If the company stops spending on advertising for three months, does demand disappear?
• If its largest customer leaves, is that annoying or catastrophic?
• If Google changes how it ranks results, does the company’s acquisition engine survive?
• If several key employees leave, does important operating knowledge leave with them?
• If a competitor copies the product’s most visible features, what remains difficult to reproduce?

This is where I find the concept of Transferable Value useful:

Transferable Value is the portion of a company’s value that survives without the person, channel or condition that originally created it.

A founder can create an extraordinary customer relationship. It becomes more transferable when that relationship belongs to the institution rather than only to the founder.

SEO can create millions in revenue. It creates something more durable when the company converts some of that traffic into customers, subscribers, community, brand recognition and direct relationships it can reach again.

A talented employee can invent an excellent operating process. That process becomes more valuable to the company when it becomes part of how the organisation works rather than something stored in one person’s head.

This creates an important distinction:

Something can create enormous value for a company without becoming an asset of the company.

What Does the Business Actually Own?

I would look underneath revenue in six places.

Revenue Durability

How much of today’s revenue provides useful evidence about tomorrow’s? Recurring revenue, repeat purchasing, strong retention, contracts and switching costs make revenue more durable. A company that has to reacquire almost its entire customer base every year may be successful, but it has to repeatedly recreate that success.

Distribution Ownership

Does the company have direct access to customers, or does it continually rent access from someone else? Google, Meta, marketplaces, partners and other platforms can all be exceptional distribution channels. The question is what the company accumulates while using them.

Competitive Defensibility

What becomes difficult to reproduce even after competitors understand what you are doing? Features can be copied. Pricing is visible. Many technological capabilities eventually become accessible to everyone. Brand, proprietary data, embedded workflows, network effects, community and trusted institutional relationships tend to be harder to reproduce.

Organisational Independence

How much of the company’s performance survives without the founder or a handful of key executives? Founder involvement is not inherently bad. The question is whether the founder’s knowledge and relationships are gradually creating organisational capability or permanent dependency.

Strategic Assets

What has accumulated because the company has been operating for years? Data, intellectual property, brand, partnerships, proprietary systems, community, customer knowledge and institutional relationships matter when they improve the company’s economics or strategic position.

And finally, optionality: what else can the assets the company has accumulated allow it to do?

Before getting there, however, there is an important reason these apparently qualitative questions matter.

They eventually show up in valuation.

Making the Existing Revenue More Valuable

Return to our two hypothetical companies.

Both generate:

Revenue: $10 million
EBITDA: $2 million

Suppose the first business is valued at four times sustainable EBITDA, while the second commands eight times.

The first is worth $8 million. The second is worth $16 million.

Nothing changed in current revenue. Nothing changed in current EBITDA.

The example is deliberately illustrative; there is obviously no universal 4× or 8× multiple. Actual valuations depend on industry, growth, margins, company size, interest rates, market conditions and the particulars of a transaction.

But why would anybody ever pay different multiples for businesses producing identical earnings?

Because they are not really buying last year’s earnings. They are buying their expectation of what happens to those earnings next.

If 35% of revenue comes from one customer, losing one relationship can fundamentally change the economics of the business. If 80% of revenue reliably recurs, considerably less of next year’s revenue needs to be rebuilt.

If almost all acquisition depends on one platform, future growth carries a different risk than a company with several proven routes to customers.

If the founder personally closes every major contract, ownership transition creates a different risk than a company with an independent commercial organisation.

The multiple becomes, among other things, a financial expression of confidence in the business underneath the earnings.

A simplified way to think about it is:

Enterprise Value ≈ Sustainable Earnings × Multiple

That makes the strategic question more interesting. Most management teams spend enormous amounts of time asking: How do we take revenue from $10 million to $15 million?

They should occasionally ask: How do we make the existing $10 million more valuable?

The answer might be reducing customer concentration. Improving retention. Building direct distribution. Increasing recurring revenue. Removing founder dependency. Improving margins. Creating proprietary data. Institutionalising important relationships.

These things may not immediately produce a dramatic revenue announcement, but they can still create substantial enterprise value.

Quantify the Dependencies

This also means that some of the business behind the revenue can be measured.

The exact metrics will depend on the business model, but I would want to know things like:

• What percentage of revenue is recurring or comes from repeat customers?
• What are gross and net revenue retention, where those measures apply?
• What percentage of revenue comes from the largest customer and the five largest customers?
• What percentage of leads or customers comes through the largest acquisition channel?
• How much revenue requires founder involvement to win or retain?
• What are gross margin and EBITDA margin?
• How much revenue comes from products introduced in the last three years?

I would resist combining these into a neat Transferable Value Score. A consulting business, marketplace, SaaS company and education platform should not be judged against the same arbitrary formula.

The purpose is simpler.

Quantify what the business depends on.

Revenue concentration tells you how dependent you are on particular customers. Channel concentration tells you how dependent you are on particular routes to market. Retention tells you how much revenue needs to be recreated. Founder involvement gives you some indication of organisational dependency.

Once dependencies become numbers, discussions that previously sounded philosophical become much more concrete.

What Else Can This Business Become?

There is one dimension that is harder to put neatly into a spreadsheet, but I think it is the most important one.

Optionality.

A valuable company isn’t merely capable of continuing its existing business. It possesses assets that give it credible choices about what it can become next.

• An education company with a strong consumer brand and thousands of users working inside major companies may have the option to move into enterprise.
• A software company with proprietary technology may have the option to license it.
• A company with strong distribution may be able to introduce adjacent products far more cheaply than a new entrant.
• A company with institutional customer relationships may be able to expand geographically or into adjacent services.
• A company with strong cash flows and organisational capability may be able to acquire smaller competitors.
• And a company with several distribution channels, flexible technology and strong customer relationships may be able to survive a major change in its category that would severely damage a more dependent competitor.

I am not making the point that you exercise every option. A company that pursues every opportunity available to it will eventually lose focus.

The value lies in having the ability to choose.

One company needs the next five years to look roughly like the previous five. Another has several credible ways to respond if they don’t. That difference may not appear in this year’s revenue.

It is still one of the most important differences between the two businesses.

What Did the Growth Leave Behind?

This is the question I would use to close the entire exercise.

If the company has grown from $1 million to $10 million, what exists today that did not exist before?

• Did the company build a brand?
• Did it create proprietary distribution?
• Did it accumulate useful data?
• Did customer relationships become institutional?
• Did the organisation learn how to create successful products repeatedly?
• Did the founder’s knowledge become organisational knowledge?
• Did margins improve?
• Did revenue become more predictable?
• Did the company become harder to compete with?
• Did it create more choices about where growth can come from next?

Growth is most valuable when it leaves something behind. Because revenue tells you how big the business became. 

The business behind the revenue tells you what was actually built.

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