IBA Blog

  • Categories
  • Authors
  • Archives
  • How Recurring Revenue Increases Business Value

    Mar 1, 2017

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Jane Johnson of Business Transition Academy (www.businesstransitionacademy.com):

    How Recurring Revenue Increases Business Value

    When it comes time to sell their businesses, the first question that most owners ask is: “How much can I get?” It makes sense. Owners are eager to cash in and be rewarded for all of the hard work they have poured into their businesses over the years.

    But the reality is that for many businesses, the initial valuation will be a much lower number than their owners want to see. In order to net enough from the sale (after taxes and fees) to fund the rest of their lives, most owners will have to work to boost the value of their businesses – sometimes significantly.

    One great way to create value is to build recurring revenue into your business model.

    The Benefits of Recurring Revenue

    Recurring revenue is guaranteed revenue for some period of time (for example, through a product subscription). Because this type of revenue does not require the same level of sales and owner effort as one-time revenue, it typically results in much higher profit margins and is always highly coveted by buyers. The evidence shows us that businesses with recurring revenue models have higher valuations than those that don’t. In 2012, Adobe went from a one-time purchase model of its software to a monthly subscription model. Two years later, its market cap was $35.5B versus $16B – a 115% increase.

    Examples of recurring revenue include:

    • Service or maintenance agreements
    • Consumable product or replacement part contracts
    • Subscriptions for products, services, or information
    • Memberships

    Recurring revenue is stable and predictable income, and as such results in higher customer lifetime value. In addition, recurring revenue can help your business weather economic recessions and is likely to simplify your business operations in many ways.

    Understanding the Value of Your Business from a Buyer’s Perspective

    Companies on a growth trajectory that can demonstrate increasing cash flows through new customer acquisition, current customer retention, and increasing market share are always much more attractive to a buyer than those that have shown little growth. Buyers want to know that revenue and cash flow are growing at a steady rate and will continue to do so in the future. And a recurring revenue model can be a great way to increase the value of the business in the eyes of a potential buyer. In Cashing Out of Your Business – Your Last Great Deal, we discuss 8 key drivers of business value that owners need to focus on before selling their businesses:

    • Increasing Revenue & Profits
    • Future Growth Potential
    • Accurate Financial Statements
    • Solid Management Team
    • Quality Products & Services
    • Strong Sales & Marketing
    • Eliminating Business Risk
    • Putting Systems & Processes in Place

    Adding a recurring business model is one of the best ways to address a few of these value drivers, boost profits, and enhance future growth potential — thereby increasing the value of a business in the eyes of a prospective buyer.

    Even well-established businesses can usually add some kind of recurring revenue to their model and reap these rewards. It may require that owners think “outside the box” or change how they have operated historically, but it will pay off in the long term. Buyers will pay more for quality companies and those that have growth potential.

    By assessing your business objectively, you will be able to identify areas for improvement so buyers will see your business in the best possible light. Planning in advance will give you time to improve your business and maximize its value. As a result, you will improve your chances of selling and obtaining the highest price for your business.

    Jane Johnson is the Co-founder of Business Transition Academy (BTA) and co-author with Kathleen Richardson-Mauro of the book, Cashing Out Your Business- Your Last Great Deal.  Ms. Johnson can be contacted for additional information about this article, her book, or the services offered by BTA at (844) 469-3948 or jane@BusinessTransitionAcademy.com.

     

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community 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”.

     

     

    Related Articles

    Conversation

    Leave a Comment

    Your email address will not be published.

    Leave a Reply

    Your email address will not be published.

    More Articles by this Author

    Recent Articles

    Why 2022 is the Year to Buy a Business in the Pacific Northwest?

    Every environment creates business opportunities and challenges.  An unexpected midafternoon summer rain generates umbrella & rain poncho sale opportunities for retailers who previously purchased the now impulsively desired inventory, taxicab & Uber revenue from previously content pedestrians, and unanticipated food & beverage orders between traditional mealtimes for restauranteurs and bar owners from people attempting to…

    The Story of David Shinder (Pedag USA)

    American Dream Achieved IBA, as an approximately fifty-year old business brokerage firm serving the entrepreneurial community of the Pacific Northwest, has been uniquely positioned since before the American Bicentennial celebration of 1976 to witness and hear the stories of thousands of people who have lived the American dream through entrepreneurship creating beloved businesses by employees,…

    Why a Top Tier M&A Professional Should be Hired to Sell Your Business?

    As the President & CEO of the largest business brokerage firm in the Pacific Northwest with a double-digit team of knowledgeable, experienced, highly skilled intermediaries, a frequent conversation held with members of my team relates to the commissions we charge our clients for professional representation.  For the unfamiliar, IBA has operated for 47 years with…

    Contributing Authors

    Sign Up for Our Newsletter

    Popular Articles Delivered Directly to your inbox