Selling a Company With a Recurring Revenue Stream

Aug 15, 2023

In 1994, as a University of Texas McCombs School of Business graduate exploring my second professional career path post-college, I entered the world of business brokerage.  The founder of IBA, G. William Ososke, and my sage mentor in this business as part of my training provided me with a comprehensive overview of the marketplace for privately held companies and the industries successfully represented by the firm and my new colleagues, a seasoned, double-digit team of high achieving intermediaries.  I learned at that time, that regardless of the industry, the most attractive companies in every segment of the economy that were always going to be asked to dance by potential buyers were the business models that generated reoccurring revenue streams from their customers.  29 years later that fact remains true.

IBA is recognized as a market-leading business brokerage firm in many industries (manufacturing, technology, construction, marine, transportation, cannabis, etc.) and for a wide spectrum of demographic groups (Russian-speaking entrepreneurs, female-owned companies, corporate executives to business owner transitions, etc.), however, one of the unique areas where we especially shine is the ability to properly value and professionally sell companies with reoccurring revenue streams as evidenced by our large body of successful achievement selling companies with that attribute over the firm’s 48-year history.  As an example of the level of precision in our process, many firms value companies using whole number multiples (4, 5, 6, etc.) of EBITDA. IBA in comparison has the knowledge, experience, and skill in house to build a composite multiple using six components where each component is assessed down to a .25 value. The difference in market value for a company with a $2,500,000 EBITDA between being multiplied by a 5 or 5.50 multiple is $1,250,000.  The overvaluation of the same company is 9% if a 6 multiple is used instead of the appropriate 5.50.  Either wrong valuation premise creates problems. The first one results in the seller leaving significant justifiable dollars on the table.  The second one can result in quality buyers not engaging, more confrontation in negotiations, or forced renegotiations after due diligence, quality of earnings analysis, or financing/investment being sought.

A top-tier mergers & acquisitions firm has the ability to value companies internally, can justify the value to accounting & finance professionals, and should be willing to do it as a complimentary service to potential “sell side” customers to demonstrate their knowledge & expertise related to the marketplace.  Mergers & acquisitions is at its core a sales profession.  The sales skills of an M&A intermediary can be the difference between receiving a premium, average, or submarket value for a company as a seller.  Compensation to the deal makers should be contingent based on deal-making not guaranteed for the advisor based on administrative & marketing activities.

What sort of analysis is important when assessing a company with a significant reoccurring revenue component? The following are a few of the items IBA looks at during its evaluation process when determining the market value of a company with this attribute:

  1. Demographics of Customers (Public Sector, Private Sector, Domestic, International, Medical, Technology, Manufacturing, Education, etc.)
  2. Customer Concentration (Manufacturer supplying Boeing vs. SaaS platform serving the general population)
  3. Customer Longevity
  4. Competitive Landscape
  5. Customer Contractual Commitment (Specific Term Agreement, At Will, Evergreen, etc.)
  6. Transaction Billing (Accounts Receivable Invoicing vs. Monthly Credit Card Billing)

Does your company have a recurring revenue component or the possibility of creating one that will enhance its market value?   The following are some examples of companies sold by IBA that had reoccurring revenue elements:

Staffing:  IBA sold a company that annually staffed seasonal forestry & agricultural industry workers for a group of clients.

Staffing Support:  IBA sold a company that rented laptops to contract employees in the technology sector to keep a bright line between equipment given to employees and tools provided to outsourced experts.

Education:  IBA has sold multiple companies that provide credit hours to satisfy continuing education requirements in trades & professions.

Medical:  IBA has sold multiple companies that have repair & service contracts with hospitals to maintain equipment.

Home Services:  IBA has sold multiple companies that have service contracts to maintain landscaping, furnaces, air conditioners, generators, hot tubs, pools, clean gutters & roofs, install Christmas lights, etc. for residential homeowners annually.

Commercial Services:  IBA has sold multiple companies that have service contracts for public & private sector commercial buildings to maintain landscaping, heating & cooling systems, gutters & roofs, asphalt & concrete, sweep parking lots, garages, and streets, etc.

Janitorial:  IBA has sold multiple companies that clean commercial & residential properties with a loyal group of long-term customers.

Property Management:  IBA has sold multiple companies that manage commercial & residential properties for customers.

Marine:  IBA has sold companies that have service contracts for the maintenance and repair of vessels ranging from fishing fleets to cargo ships to Coast Guard and Navy vessels.

Transportation:  IBA has sold companies that maintain & repair government and commercial fleets of vehicles.

Manufacturing:  IBA has sold companies that provide important component parts with specific fabrication processes and tolerances for a spectrum of publicly traded companies.

Distribution:  IBA has sold companies that have long-term reorder programs with customers for everything from shoe inserts to Italian wine to balloons.

Technology:  IBA has sold companies that maintain voice, video, data, and security infrastructure in hospitals, military facilities, prisons, schools, hotels, and other businesses.  We have sold SaaS and subscription-based E-Commerce companies.

Gyms & Fitness Programs:  IBA has sold businesses that have high demand and high retention of customers desiring to stay fit, recover from injury, or battle the aging process.

Professional Practices:  IBA has sold optometric, dental, veterinary, accounting, engineering, and other professional practices where customer files are a significant asset.

Insider Note: An interesting tangential transaction space, which IBA calls Pseudo Reoccurring Revenue, involves retail businesses that have prime, high-traffic locations that result in a steady stream of customers.  Examples include a gas station in close proximity to an airport that people use to refill their rental cars before drop-off and a food service business at a ferry terminal or airport.  Although these businesses may not be able to name their repeat customers, every day they open their doors for business they know customers will be visiting. Similar to companies with reoccurring revenue streams it is important to employ a business broker to value these businesses with knowledge of market dynamics and what other businesses have sold for recently.   

There is no substitute for experience and knowledge of the marketplace in the professional sale of a business.  If you are thinking of selling your company with a recurring revenue component in 2023 or 2024, we would welcome the opportunity to provide an overview of our professional services. We are confident that we can sell your business for top dollar in a transaction employing best practices.  All conversations with IBA are held in strict confidence.  IBA does not seek a penny of compensation until a project has been completed.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, legal, and accounting communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.