How to assess revenue quality in FDD: recurring vs non-recurring revenues, customer concentration, contract analysis and red flags for Transaction Services interviews.
Revenue quality is the first and most important dimension of a Quality of Earnings analysis. A high EBITDA multiple is only justifiable if the revenue base it rests on is solid, predictable and protected. Here's how to assess it.
Revenue quality is a measure of how confident a buyer can be that the revenues in the historical accounts will continue and grow under their ownership. High-quality revenue is:
Low-quality revenue is project-based, concentrated, informal or inflated by aggressive accounting.
The first cut is to categorise revenues by their nature:
In QoE terms, exceptional revenues are neutralised in the EBITDA bridge. The mix of recurring vs quasi-recurring vs project revenue drives the buyer's confidence — and influences the multiple.
The top 5 and top 10 customer analysis is standard. Key metrics:
A rule of thumb: >20% from one customer is a material risk. >50% from three customers is a significant structural concern.
For the top customers, review the contracts:
Under IFRS 15, revenue is recognised when (or as) performance obligations are satisfied. Warning signs of aggressive recognition:
"I would segment revenues by type (recurring, quasi-recurring, project), analyse customer concentration and contract quality for the top customers, and check for change of control clauses. I'd then reconcile revenue timing to delivery milestones to test the recognition policy."
The programme's case studies include revenue analysis with multi-year customer data, contract extracts and recognition policy notes — exactly the data you'll work with in a real FDD.
Hundreds of candidates prepared their interviews with this programme. Those who landed the role have one thing in common: they worked the cases before walking into the room.
