MX3 Collectif – How diversified should your company’s revenues be? by Reed Phillips, CEO of Oaklins DeSilva+Phillips,.

As part of our Collectif, in which we feature the work of our partners (see more here). Here Reed Phillips, CEO of Oaklins DeSilva+Phillips, an investment bank for the media, marketing, and technology industries, based in New York City asks how diversified a media company’s revenue strategy should be, and what makes them more attractive to investors.

Media owners who are building businesses that will eventually be sold or invested in need to be focused on revenue diversification. That’s because investors and buyers prefer owning or acquiring media companies with diversified revenues. They are cautious about being solely dependent on one source of revenue. That’s because the risk is much higher that a company with only one revenue stream becomes challenged if that source of revenue is threatened. 

Blockbuster is a classic example of relying too much on one revenue stream. In their case, revenue came almost exclusively from the sale and rental of videotapes. When streaming became available, Blockbuster was quickly in trouble and never recovered.

Clearly, there is a need for some revenue diversification to protect a business from this kind of calamity. On the other hand, some media businesses go too far and become too diversified, which can make a company overly complex and unattractive to investors and buyers. 

The trick is to find the right balance. Your revenues need to be diversified, just not too diversified.

We have had clients with so many revenue streams that none were dominant. When this happens, it becomes harder to pinpoint what the company does better than its competitors (other than having more revenue streams!).

Investors and buyers want to compare your company to other companies to understand what makes yours better. If you rely on too many revenue streams, they might think you are distracted and missing out on growing the more promising revenue streams. They expect you to identify which sources of revenue are the most profitable or fastest growing and focus on them. 

Let’s explore two ways you can effectively diversify your revenue so that you are attractive to investors and buyers.

More revenue streams for the same business

How many revenue streams should a business have? There is no precise answer. It depends on the size of your company and your market. 

I believe that three to five revenue streams is ideal for a small or mid-sized business. For example, a magazine business might have advertising and subscriptions as the dominant revenue streams. But they may also derive revenue from events, marketing services and lead generation.

More businesses representing additional revenue streams

Another way to diversify is to have more than one business within your company, kind of like a portfolio of stocks. Ideally, you would have businesses in different sectors so that you become more insulated if one sector gets into trouble.

If one sector, say travel, goes down the decline may be offset by another sector, such as entertainment. Having several businesses in the same sector is a pretty good diversification strategy, but having businesses in several sectors can be even better.

In conclusion, having only one source of revenue for your business can be as much of a problem as having too many sources. Find the happy medium.

Reed Phillips is CEO of Oaklins DeSilva+Phillips, an investment bank for the media, marketing, information and technology industries. His firm has completed more than 400 M&A transactions.

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