Taking It To The Next Level
Some interesting patterns emerge when you group the 7.5 million private companies in the U.S. by key revenue thresholds. Two-thirds of the companies fall in the $0 – $1 million revenue range while only 5 percent of the companies cross the $10 million hurdle. Capitalism is a demanding scorekeeper. These critical revenue thresholds precisely define taking it to the next level. Moving through these thresholds is much like running the gauntlet – it requires drive, determination, skill, and the occasional break of good fortune.
Private companies can be separated into three broad segments based on revenue. $3 million is an important milestone because there is sufficient revenue where a business owner has the option to expand into the Emerging Growth segment (or not). $10 million is important because this is the revenue level where a company gets on the radar screens of many financial and strategic buyers. $100 million is key because the company is nearing the size where an IPO may be a viable option.
Six critical thresholds depict “taking a company to the next level.”
- Start-up: revenue between $0 and $1 million
The Start-up stage represents the birth of a company where the entrepreneur’s grit and drive brings an idea to life. The product or service takes shape and is validated in the marketplace by customers willing to pay for it. Employees are hired, suppliers are selected, and operations are put into place.
- Start-up Breakout: revenue between $1 million and $3 million
The Start-up Breakout stage is where the entrepreneur commits to building a larger company. More employees are hired, selling methods are refined, business relationships are extended, and an unyielding focus on satisfying customers resonates throughout the company.
- Emerging Growth: revenue between $3 million and $10 million
The Emerging Growth stage is when the company’s product or service really takes hold … and entrepreneurial risk is further tested. More customers lead to more employees, greater reliance on suppliers, and overcoming operational challenges to scale the business as the “whole product” is created.
- Lower Middle Market: revenue between $10 million and $25 million
Breaking into the Lower Middle Market is a hallmark that, frankly, relatively few firms obtain. A “whole company” is now built-out as the organizational chart expands into various functional groups, more products and services are brought to the market to satisfy the needs of an expanding customer base, and operations are made more versatile and resilient.
- Lower Middle Market: revenue between $25 million and $100 million
Expanding further into the Lower Middle Market creates more value by increasing the size of the company and putting more distance from the rest of the pack. The expansion of core capabilities, deepening ties with customers, and sharpening sales effectiveness leads to an expanding customer base that can be sold back into creating a virtuous cycle.
- Middle Market: revenue between $100 million and $500 million
The Middle Market sees a much broader company with deep penetration into markets they are able to serve well, grow, and defend.
It is important to keep in mind that revenue is different from earnings when determining the value of a company. There are many examples of companies that generate less revenue, but earn substantially more than companies producing higher revenues. Gross profit margins and EBITDA margins (Earnings Before Interest, Taxes, Depreciation, and Amortization) vary from industry to industry and, naturally, from company to company within an industry. So revenue is only part of what makes a company valuable, albeit an important part. Moving through these critical revenue thresholds – with profitability and Return On Invested Capital above the industry average – is what sophisticated buyers highly desire.
Transaction intermediaries facilitate finding buyers and getting deals closed. There are two types of transaction intermediaries: business brokers and investment bankers. While there are no hard and fast rules, typically business brokers specialize in selling companies with revenues under $5 million and investment bankers specialize in selling companies with revenues over $10 million. The gap between $5 and $10 million is filled by smaller “boutique” investment bankers and some business brokers. In many situations, a transaction intermediary is not needed. However, in certain situations a transaction intermediary can add substantial value.