Recurring revenue is the brass ring for CEO’s looking to maximize value and create an easily sellable company. Learn how to secure stable and predictable cash flow in your business.
A customer base with recurring revenue that is contractual increases the odds that the business will be able to accurately project revenues and cash flow into the future.
From a business buyer’s perspective, this reduces the risk and therefore enhances the perceived value of your company. The value associated with acquiring the available cash flow is directly related to the risk of losing it! The lower the risk of losing that cash flow in a transfer of ownership, the higher the price will be to acquire it. Any factor that reduces risk profile is reflected in increased transaction value.
Here are a list of the types of recurring revenue.
Selling a consumable, whether it be diapers, medications, or restaurant supplies, track your repurchase rate from current customers.
Revenue that is guaranteed into the future for example, loyal subscribers to newspapers, websites, and other publications get an annual renewal statement.
Automatically-renewed subscriptions or memberships are more valuable than periodic renewals because they require a conscious decision to cancel rather than renew. For instance, your gym membership or premium movie channel subscription on cable television renew automatically until you take action to cancel. This type of arrangement takes advantage of human nature to be passive which increase customer retention rates. This is why this type of revenue streams commands higher valuations.
Contracts are the best! Cell phone companies are one of those industries that compel you into a multi-year contract. When a company is acquired, the owner and some employees may leave after the acquisition. But customers with contract commitments remain and create security and value for the buyer.
Find a way to create a recurring revenue model for all or some component of your business and you’ve done one of the most important thing you can do to increase business value. Time to get to work!
Edward Valaitis Managing Director of Edison Avenue has earned his Certified Business Intermediary (CBI), Certified Merger & Acquisition Professional (CMAP), Certified Value Builder (CVB). He has more than 25 years of experience building, managing, and selling companies with expertise in business transactions, business valuations and growing businesses. Business Broker serving the United States based in Tampa and Destin, Florida.