Not all revenue is created equal...
- Peter Lopez
- Apr 23
- 5 min read
If you’ve spent any time running a business, you’ve probably had that one client. You know the one. Their name pops up on your phone, and your stomach immediately does a somersault. You know the call is going to be about a "crisis" that isn't a crisis, a request for a discount on work already completed, or a complaint about a process they agreed to three months ago.
But then you look at your P&L, see the check they write every month, and tell yourself, “It’s fine. Revenue is revenue. Growth is growth.”
I’m here to tell you that’s a lie.
In my eight-plus years as a business broker and after performing over 100 valuations, I have seen a recurring theme: the biggest, loudest "top-line" numbers often hide the most fragile businesses. I’ve seen $10 million companies that no one wanted to buy and $2 million companies that sparked bidding wars.
The difference? Friction.
The Top-Line Trap
Most business owners: especially the "Operators" like Mark, who are deep in the daily grind: focus on the "Top Line." They think that as long as the revenue number is going up, the value of the business is going up.
But not all revenue is created equal. Some revenue is "high-octane fuel" that powers your growth, and some revenue is "sludge" that gunk’s up your engine.
When I look at a business through the lens of a potential buyer, I’m not just looking at the amount of money coming in. I’m looking at how hard you have to work to get that money. If you have to jump through ten hoops, tolerate late payments, and deal with constant scope creep just to collect a invoice, that revenue is actually costing you value.
The 80/20 Friction Filter
We’ve all heard of the Pareto Principle: 80% of your results come from 20% of your efforts. But in the world of business value, the "Friction Filter" is more accurate: 80% of your headaches come from 20% of your customers.
These "High-Friction" clients are value killers. They demand the most time from your best employees, they slow down your internal processes, and they often have the thinnest margins.
Think about it from the perspective of Linda, the "Planner." She wants her business to be a turn-key asset. She wants clean financial statements and reporting that show a predictable, smooth operation. High-friction clients make that impossible. They create "noise" in the data and "chaos" in the culture.
What does "Friction" actually look like?
Friction isn't always a screaming customer. Sometimes it’s subtle. It looks like:
Payment Lag: The client who takes 60 days to pay when your terms are 15. This kills your cash flow and complicates your working capital requirements.
Scope Creep: The "while you're at it" requests that slowly bleed your profit margins dry because you aren't billing for the extra time.
Manual Overrides: The client whose needs are so "unique" that your team has to bypass your standard operating procedures just to serve them.
Emotional Tax: The clients that make your top talent want to quit. Replacing a key employee is a massive hit to business value.
Why Friction Kills Your "Multiple"
When a business is sold, it’s usually valued as a multiple of its earnings (SDE or EBITDA). If you want to dive deeper into how these adjustments work, check out our page on add-backs and adjustments.
A "multiple" is essentially a reflection of risk.
Low Risk = High Multiple.
High Risk = Low Multiple.
Friction is a massive risk. A buyer doesn't want to buy a job; they want to buy a cash-flow machine. If the machine requires the owner to spend 40 hours a week "managing" three difficult clients, the buyer sees a job. They see a risk that those clients will leave the moment you do, or worse, they see a risk that they’ll stay and continue to drain the company’s resources.
I’ve seen deals fall apart during due diligence because the buyer realized that a significant portion of the revenue was "low-quality." They saw that the "Gross Merchandise Value" (GMV) looked great, but the actual revenue quality was poor because the cost to serve those specific customers was unsustainable.
The Quality vs. Quantity Debate
Not all dollars are the same in the eyes of the market. Recurring revenue: money that comes in automatically every month: is generally worth much more than one-time project revenue. Why? Because it’s predictable.
But even within recurring revenue, you can have friction. If you have a subscription model but a 50% churn rate because your customers are unhappy, that’s high-friction revenue.
As someone who has sat at the closing table many times, I can tell you that a buyer will gladly pay a premium for a "clean" business with $1M in revenue over a "messy" business with $2M in revenue. Clean means standardized processes, happy employees, and low-friction clients.
Practical Step: How to Apply the Friction Filter
So, how do you fix it? You have to be willing to do the one thing that scares most owners: Let go of the wrong revenue.
Here is a simple exercise I recommend to any owner looking to build long-term value:
List your top 20-30 clients by revenue.
Assign a "Friction Score" (1-10): How much manual effort, emotional stress, and "off-book" work do they require?
Assign a "Margin Score" (1-10): After all time and expenses are accounted for, how profitable are they really?
Identify the "Bottom 10%": These are the high-friction, low-margin clients.
Once you identify them, you have two choices: Fix them or fire them. Fixing them usually means raising prices significantly or strictly enforcing boundaries and scope. If they leave because of the price hike? Great. You’ve just freed up capacity to find a "Low-Friction" client who values your work.
Cleaning Up the Operation
When you remove the "sludge" from your business, something interesting happens. Your team gets more efficient. Your insights into your own numbers become clearer. You stop managing by "feeling" and start managing by "fact."
Most importantly, you increase the value of your business. You are moving from a business that is "dependent" on the owner’s ability to put out fires to a business that is "built for value."
I’ve seen this happen over and over. An owner gets brave, fires their worst client, and suddenly finds that their remaining clients get better service, their employees are happier, and their bottom line actually improves because they aren't wasting resources on a lost cause.
Final Thoughts
Revenue growth is a vanity metric if it comes at the cost of your sanity and your business's future sale price. If you want to build something that lasts: and something that a buyer will actually want to pay for: you have to prioritize quality over quantity.
Stop accepting friction as "normal." It’s not. It’s a leak in your value bucket. Plug the leak, filter your clients, and focus on the revenue that actually helps you grow.
– Peter
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