Businesses with a higher percentage of recurring revenue generally sell for higher prices. Recurring revenue business models are highly sought after by strategic and private equity buyers because they are perceived as less risky. Future revenue is more predictable and requires less ongoing sales effort and reinvestment.
Companies like Salesforce.com pioneered recurring revenue in the software world, creating the Software as a Service (or SaaS) model. SaaS turned the traditional software licensing model on its head. Not surprisingly, acquirers of software companies reward sellers who’ve built a low-risk subscription model that looks to them like an annuity stream.
Companies in all industries can increase value with a recurring revenue model. Property management companies sell for more than real estate brokerages, for example, because they have long-term management agreements with landlords and leases with tenants that produce steady monthly revenue. Staffing companies, which place temporary workers with employers and produce annuity-like monthly revenue, sell for more than project based recruiting firms. Distributors who sell primarily proprietary products to OEMs sell for higher multiples than distributors who primarily sell commodities to end-users because high switching costs make customer relationships last much longer.
What percentage of your company’s revenue is recurring?
Almost any business can find at least one recurring revenue opportunity. A license-based software company for example can add an annual support program. Almost every boutique wineries has a wine club that automatically ships wines to customers on a monthly or quarterly basis. Restaurants can create loyalty programs that encourage customers to return on a regular basis.
Whether you are planning to exit soon or years from now, we encourage you to consider the immediate cash flow and future valuation benefit of recurring revenue.
Contact us for more information on increasing the predictability of your business revenue to increase enterprise value.