When assessing the value of a business, one of the largest drivers is recurring revenue. With recurring revenue, a potential buyer can determine where your sales are driven from and the likelihood of them being maintained. If your business has a strictly transactional model, the value of your company will be lower than compared with one that can demonstrate recurring revenue.
A recurring revenue stream enables a potential acquirer to forecast months or years into the future depending upon the type of revenue stream. This ability increases the desirability and value of your company.
The more confidence placed on your future revenue, the higher the value the market will place on your business. Below are some examples of recurring revenue streams.
Renewable subscriptions (e.g., magazines, paying your annual accountants bill monthly in advance)
Typically, subscriptions are paid for in advance, creating a positive cash-flow cycle.
Sunk-money renewable subscriptions (e.g., Service contract on equipment install)
Have you recently supplied a piece of equipment that will need to be maintained?
Automatic-renewal subscriptions (e.g., Cloud Storage)
Many of us pay a small amount each month to store documents in the cloud.
Contracts (e.g., Mobile Phones)
As much as we may despise being tied to them, mobile companies have mastered the art of recurring revenue. Many give customers free phones if they lock into a two or three-year contract.
When you put your business up for sale, you’re selling the future, not just the present. So if you don’t have a recurring revenue stream, consider how best to create one, given your type of business. It will increase the predictability of your revenue, the value of your business, and the interest of potential acquirers as they look to the future.
To see how your company ranks against the key business value drivers, click the link to take a 13 minute survey Value Builder Score Survey . You will then receive your free assessment on how you’re doing in each area.
Contact us to discuss the ways in which you could increase the value of your company.