What percentage of your company’s revenue is recurring?
Many of my M&A brokerage clients are companies with naturally recurring revenues. Recurring revenue business models are attractive to strategic and financial buyers, for good reason. Recurring revenues are predictable, and require little or no ongoing sales effort. Buyers are interested in purchasing businesses where revenue is predictable, and as close to ‘guaranteed’ as possible. Recurring revenues can often propel a company to break-even or profitability without additional operational churn. In our experience, businesses that incorporate recurring revenue in a significant way often sell for multiples above those in their respective industries that do not.
Companies like Salesforce.com pioneered recurring revenue in the software world, creating the Software as a Service (or SaaS) model – turning the traditional licensing model on its head. Not surprisingly, a company looking to acquire a software business will reward the seller when revenues are built upon an ongoing annuity stream. This revenue model is highly attractive to acquirers, versus models where top line sales start from scratch each month.
Companies across industries benefit from recurring revenues. For example, Property management companies have long-term rental agreements and collect rent commissions each month, and staffing companies place consultants into ongoing corporate roles which generate monthly annuity streams.
Even if your business does not directly generate recurring revenues, almost any business can hone in on some percentage of revenues that are recurring in nature. A software company can add value with ongoing support and maintenance programs; a restaurant can create loyalty programs to drive return customers on a regular basis.
Whether you’re interested in planning your own exit immediately or years from now, it’s useful to consider the short-term and longer-term benefit that recurring revenues can play in your business.
Jordan Zweigoron is a Senior M&A Advisor with Exit Strategies Group’s Silicon Valley California office. He can be reached at (408) 769-4404 or jordan@ExitStrategiesGroup.com. Connect with Jordan on LinkedIn.