Revenue and Margin Erosion
Should you buy a business with declining revenue?
Revenue declining, or revenue flat while margins shrink year over year.
What to ask for
Suspecting a flag is not the same as verifying one. These are the documents and signals that turn a hunch into a decision.
- Monthly revenue and gross margin for thirty-six months.
- Price changes by year, and when the owner last raised them.
- Revenue split by customer and by product line, to find what is actually shrinking.
- Any one-time revenue inflating the trailing twelve months.
The question to ask the seller
“What is squeezing the numbers: volume, input costs, pricing, or mix? When did you last raise prices?”
Ask it in those words. A seller who answers straight is telling you something. A seller who dances is telling you more.
You are buying the trend, not the trailing twelve months. A recovery you have not modelled and cannot cause is a hope, and hope does not service debt.
Diagnose the cause before you price it. Fixable and specific: price a cautious recovery. Structural and market-wide: lower the offer to the trend. If reversing the erosion is your entire thesis, that is a turnaround, and it should be priced as one.
Diagnose the cause. If it is fixable, price a recovery cautiously. If it is structural, lower the offer to the trend, or walk if the erosion is your thesis.
Travels with
Flags that show up together.
Screening one of these usually turns up the others. They share a cause more often than they share a coincidence.
Every deal you read gets safer.
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