Does anyone have experience with businesses with project based revenues?

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October 12, 2020

by a searcher from INSEAD in Vancouver, BC, Canada

I've spotted a few contracting businesses with high EBITDA margins. Though they have strong contracted revenue streams looking 2-3 years out, the timing of these can certainly pose issues with respect to cashflow-timing and debt payment.

If anyone has any experience in this area, I'd appreciate the opportunity to chat!

Happy searching!

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Reply by a searcher
from Carnegie Mellon University in Chicago, IL, USA
Matthew - I previously was an employee in a company with project-based revenue streams and a family member owned and operated an abatement/remediation business that was project-based. Aside from more specific questions you may have, the three big takeaways for me for operating businesses like this are:
1. You have to constantly be keeping your sales pipeline full.
2. You can get creative on the payment structure (i.e. fixed fee, milestone payments, EAC, etc.) to try to better fit your cash outflows to limit risk. The types of customers that you work with will determine how open they are to these arrangements (i.e. government, private sector, etc.).
3. You will have to keep a larger amount of working capital in the business than you might expect.

Happy to chat further if you'd like.
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Reply by a searcher
from Universität Mannheim in Munich, Germany
Adding to what Jake said, you have to be on top of your working capital. It is very easy to starve your business if most of your revenue comes late into the project.

I would really look into the type of projects and the conditions the company currently has on those projects. I wouldn't count on changing the payment structure quickly so you have to look at how the company works right now. That will be your reality at the beginning. Depending on the industry it might not be easy to change those terms for future projects or the clients will want something in return.

Also consider the customer concentration, some project based businesses depend on a couple of recurring clients.

Your DD in such businesses should go deep into the terms and the clients.
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