Want to make your company infinitely more valuable? There are few things more important than recurring revenue for a business, especially when preparing to sell the company.
Recurring revenue is predictable revenue expected to continue in the future with a high degree of certainty. It comes in regular intervals usually monthly or yearly. Recurring revenue increases and stabilizes cash flow – a key metric financial analysts consider when determining value.
Not only are recurring revenue streams profitable and create loyalty for business owners, but they also add value to customers. These services increase convenience, ease-of-access, and can provide discounts on products/services. They are also a cost-effective way to reduce bank charges and transaction fees.
Recurring revenue is highly desirable for most business owners, investors, and potential buyers. Below we will discuss how it impacts the value of a business and several ways to create recurring revenue.
How does it impact the value of your business?
Think about how your customers pay. Are they one-time transactions? If so, expect the value of your company to transact at a lower valuation multiple.
Whereas, if you have a recurring revenue model where your customers pay on an ongoing basis, you will have a much higher valuation multiple. One reason for a buyer paying a higher multiple is because they can expect that the company will continue to make money after the owner exits the business. However, keep in mind each revenue stream’s value varies in importance and how the potential buyer views it.
Ways to Create Recurring Revenue
The following are several ways to create recurring revenue, business models. Each has examples to help you better understand the variety of opportunities that exist. For help in identifying what opportunities your business has, seek the help of a business valuation analyst such as Peak, a business appraiser in Utah. They can help you identify opportunities in your business to add value.
If you have a product or service people consistently need, consider offering it on a subscription basis. For instance, GOAT – a new haircut franchise – recently started a subscription model. Customers can get a haircut as many times as they wish during the month when paying the monthly subscription fee.
Another example is Target. Target sells subscriptions to diapers. This is convenient for parents who may be so busy they do not have time or interest in running to the store to restock on diapers.
Dollar Shave Club was recently acquired by Unilever for a 5x revenue multiple because it sells razor blades, a product constantly replaced, on subscription.
Offering your customers a subscription option for your product or service at a discount is a great way to guarantee a recurring revenue stream. Of course, it is still a good idea to offer one-time purchase options to attract a wider audience. But when the subscription comes with a price per product discount, many customers find it hard to resist.
Depending on your service, creating premium membership groups can increase value to your customers and create recurring revenue. A membership site is a place where you can deliver content, build a community, and offer to coach or consult. If you have specialized advice or information, consider offering your know-how to subscribers only for a recurring monthly fee. Today there are membership groups and websites for just about anything.
Does your business bill by the hour or project? Consider moving to a fixed monthly fee for your service. This helps create more predictable revenues for your service business. Companies like lawn care, pest control, all thrive from service contracts.
Phone companies also thrive on this model and are a perfect example. For instance, when the iPhone was first launched, AT&T insisted buyers sign a 2-5-year service contract. This contract revenue increased the value of AT&T stock considerably.
Think of your customer buying process. What comes before or after they buy what you sell? For instance, say your business designs websites. Individuals who need a new website, often recently started a business. Offering services around starting a business can add an additional revenue stream. On the other side, once they have a website, the business owner will need a hosting site. Hosting websites for your customers on a subscription basis creates recurring revenue. Diversifying your product line will increase recurring income and the customer’s received value.
This type of revenue is auto-occurring or “evergreen” meaning it sends you a bill in perpetuity assuming you to be a customer forever. Examples such as this include Amazon prime – which auto-renews on a yearly basis. Many carwashes also recently switched to this model. Rather than charging $12-$20 per wash, they offer an auto-renewal monthly fee for unlimited car washes for $30.
Benefits of a Recurring Revenue Model
Creating recurring revenue streams is one of the smartest ways to add value to your business. Not only does it decrease owner dependence, but it also helps eliminate the constant need to individually sell products or services. In addition, it creates consistent revenue now and helps maximize the value when it comes time to sell.
Throughout the process don’t forget your customers – they are the lifeblood of your business. Whichever method you choose, focus on giving your customers better service and support through the recurring revenue stream.
Peak as a leading business appraiser in Utah provides business valuations with quality insights others don’t provide. Through a business appraisal, a valuation expert will identify opportunities such as recurring revenues that can add value to your business. Want to get started building a more valuable business?