Build Recurring Revenue: A Crucial Component For Successful Businesses
Recurring revenue is highly sought after for business owners looking to have a valuable and sellable company. In this article, learn how to create stable and predictable cash flow for your business.
Consider revenue and the net cash flow of your business as the first introduction to a buyer. Revenue and cash flow is the number one attraction. A business with an established pattern of growth will bring a premium price when it is sold. Making recurring revenues comprise a material portion of a company’s overall revenues the recurring revenue will be valued at a higher level than non-recurring revenues. Recurring revenue is the holy grail for business owners looking to have a valuable and sellable company.
From a buyer’s perspective this reduces future risk and therefore — enhances perceived value. The value associated with acquiring the available cash flow is directly related to risk. 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 is rewarded with a higher sellable value.
Although all recurring revenue will have a positive impact on business value, some forms are more desirable than others. Here is a list of the types of recurring revenue in an order from good to best.
If your company sells consumable products that consumers buy on a regular basis that are used up quickly such as food and cleaning supplies or Goods used up by a business as part of its operations. For example, printer cartridges used in an office. Hospitality goods used up by tourism related industries such as the soap in hotel rooms.
Whether it be commercial cleaning supplies or office supplies — start tracking your repurchase rate from existing customers. This will be a number that buyers will use to calculate your projected sales into the future and calculate how much they’re willing to pay to buy your company today.
Even better than having loyal customers who repurchase is having revenue that is guaranteed into the future — the subscription model. If you're not familiar with them, Company's like Ipsy and Birchbox sell beauty products for women, Blue Apron and Home Chef deliver a box of ingredients for a complete meal that you cook at home, Dollar Shave Club sells men's shaving products, Stitch Fix sells fashion. Success in subscription does not depend on what's being sold, it's a new way of selling products regardless of the product category.
Automatically renewed subscriptions are even more attractive than periodic renewals because they require a conscious decision to cancel rather than renew. For instance, we use Mozy.com to automatically backup some of our office computers online on a daily basis and are charged a fee each month. This subscription service has no end date unless we tell them to stop providing the service. By tracking historic cancellation rates, revenues can be predicted well into the future, which is why these types of revenue streams enjoy higher valuation for your business.
The only thing more valuable than an automatic renewal subscription is a hard contract for a defined term. Wireless cell phone companies come to mind as one of those industries that push hard to get you on a multi-year contract. When a company is acquired, the owner and some employees may leave after the purchase. However, customers with plenty of time remaining on their contracts are security for the purchaser. As you ascend the recurring-revenue hierarchy, the value of the business will go up accordingly.
Recurring Revenue Models for Your Business
Do you think that recurring revenue is tough to achieve in your business? Here are some examples of recurring revenue models that might spark some ideas:
- Maintenance contracts
- Monthly support agreements
- Annual license agreements
- Accounting firms that provide annual tax return preparation and audits
- Security firms that monitor home and commercial businesses on a monthly basis
- HVAC companies that perform routine maintenance of equipment
- Software companies that provide annual user support and software upgrades for a maintenance fee
- Landscape maintenance companies
- Pool service company
- Janitorial company
Benefits of Recurring Revenue
The recurring revenue customer base you build for your company will:
- Increase the probability that you will have stable revenues and cash flow
- Decrease future risk in the mind of a potential buyer
- Provide you with an opportunity to sell additional products or services to your existing customer base
- Keep you more attuned to your customer needs while helping you ward off competition
- Provide a corporate buyer with the opportunity to cross-sell its products to your customers
- Provide a justification for a higher sale price of your business
- Ensuring your company has a predictable and stable revenue base will mitigate risk in your business and lead to a much higher valuation.
Create a Business That Can Thrive Without You
You have worked hard to build your business and make it what it is today. It is essential to seek professional advice and support to maximize your return when you sell your business.
Author - Joe Griffith
I've been consulting with clients since the 90's in various capacities. I launched my first start-up when I was 25 years old. I since built and sold 4 start-up business since then. It's only been in the last 8 years that business owners have paid me to develop systems and procedures for their business.