Businesses built on a recurring revenue stream are very popular with buyers. They are also favorites for consolidation within certain industries. Industries such as exterminating, waste management, HVAC, document destruction, records storage and landscaping businesses are all good examples of recurring revenue businesses. They are very popular with buyers and are constantly sought after by bigger firms attempting to consolidate their industry.
Why is Recurring Revenue so important?
Buyers like recurring revenue due to its predictability. It provides a level of confidence to the buyer as he is negotiating the terms of the transaction, which can result in a higher offer price. Recurring revenue is often more valuable in a transaction than one-time revenue. Recurring revenue helps sell your business more quickly and at a higher valuation.
Long term customers that have utilized the company’s service for a period of time are an indication of the stability of the business, verify demand for the product and demonstrate consistently good service. These are all features a buyer wants when they make an acquisition.
Recurring revenue allows a buyer to learn the intricacies of the business, while still bringing in a reliable revenue stream in the time period immediately after closing.
Strength of Your Annual Recurring Revenue.
Recurring revenue is more valuable to a buyer if it is secured by a written and binding service agreement. It is always disappointing to discover a recurring revenue business that has no written customer service agreements. I often hear an owner say “we have never lost a customer” or “our great service is our contract”. That may all be true until you go to sell your business. Without a written agreement, many buyers don’t consider it to be recurring revenue. A customer could leave after the purchase if he doesn’t like the color of the buyer’s shirt or could get poached by a competitor that is offering a lower price. Lack of written agreements results in lower business valuation and offer prices.
Features of Your Customer Agreement.
Important features to include in a customer agreement are a minimum 1 year term, an evergreen renewal feature, assignability and limits of liability. Do not include an easy out clause allowing the customer the ability to cancel the agreement for any reason of their choosing.
Make a Plan to Increase Recurring Revenue.
There are innovative ways to increase recurring revenue. With good record keeping, you can identify returning customers that may be enticed to go to a recurring model. Offering discounted initial pricing may convince recurring customers to sign a written agreement. Spending your advertising dollars targeting potential recurring business as opposed to one-time revenue opportunities. Recurring revenue helps sell your business more quickly and at a higher valuation, so increasing it is well worth the effort.
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Business Broker and Consultant
DeFoor Business Services
Corporate Office