Many owners will have to boost the value of their businesses before they transition them to new owners. If these owners were to sell today, they would not net enough money from the transition, after taxes and fees, to fund the rest of their lives. It may also be necessary because multiple family members have been added to the payroll and the business cannot support everyone now, and in the future, without increasing cash flow.
In our book Cashing Out of Your Business – Your Last Great Deal, we discuss how owners must be vigilant about keeping their businesses competitive and growing in order to ensure that the value increases and their largest asset is protected. We also discuss 8 key drivers of business value, three of which include increasing revenue, increasing cash flow, and removing the business’ dependence on the owner. Easy to say, harder to achieve.
One key strategy for accomplishing all three of these value drivers is to add recurring revenue to your business.
What is Recurring Revenue?
Recurring revenue is guaranteed revenue, at least for some time that does not require the same level of sales and owner effort as one-time revenue. This revenue often has much higher margins and is always highly coveted by buyers. Studies show that businesses with recurring revenue sell at much higher multiples than those that don’t.
Examples of recurring revenue include:
- Service or maintenance agreements
- Consumable product or replacement part contracts
- Subscriptions for products, services or information
- Memberships
How Does Recurring Revenue Help?
In his new book, The Automatic Customer, author John Warrillow outlines nine possible subscription business models, as well as many additional benefits of adding recurring revenue streams to your business. Some of these benefits include:
- Making your customer relationships “sticky” so it’s harder for them to leave you.
- Increasing the lifetime value of customers – subscription customers buy more add-on products and services.
- Smoothing out demand for your products and services so it’s easier for you to operate.
- Recession-proofing the business.
- Improving cash flow once you are up and running.
All of these benefits help to grow your business, make it easier to operate, and increase its value.
We agree with John that most businesses could add some kind of recurring revenue to their model and reap these rewards. Here’s the tough part: It will likely require that owners think outside the box and question how they’ve operated historically. It’s a whole new world and owners must be willing to think differently in order to stay competitive and grow their businesses. Not growing is simply not an option for most owners.
Employees and family members count on owners to put them on a path for success, and we strongly urge all owners to consider ways to add recurring revenue to their businesses and use this key strategy to their advantage, especially if you’re thinking of exiting your business in the near future.
