The Hierarchy of Recurring Revenue - How to make your company irresistible to potential buyers and give you the lifestyle you want now

One of the biggest factors in determining the value of your company is the extent to which a potential buyer can see where your sales will come from in the future. If you’re in a business that starts from scratch each month, the value of your company will be lower than if you can demonstrate the source or sources of your future revenue.

A recurring revenue stream acts like a powerful pair of binoculars for you – and your potential buyer – to see months or years into the future. Creating an annuity stream is the best way to increase the desirability and value of your company. 

I learned this lesson early in my career in media sales.  When I first started, I would get any sale I could to hit my monthly target.  However, each month I found myself having to resell each of these customers over again.  That took a lot of time and energy.  To resolve this, I set a goal to sell long term contracts.  Once I started this I would be going into each month now at 70-80% of my budget  This allowed me more time to start focusing on larger business who could spend more for longer periods of time.  This made my life a bit less stressful and was able to begin to enjoy my life with my family.

The secret to increasing your profitability and value of your business is to focus on increasing your average number of transactions and your average dollar sale for each customer.  In other words, how do I get them to come back sooner for more money.

The surer your future revenue is, the higher the value the market will place on your business. Here is the hierarchy of recurring revenue presented from least to most valuable in the eyes of an acquirer.  See what strategy fits your business model best and see how you can implement it right away.

No. 6: Consumables (e.g., shampoo, toothpaste)

These are disposable items that customers purchase regularly, but they have no particular motivation to repurchase from one seller or to be brand loyal.

No. 5: Sunk-money consumables (e.g., razor blades)

This is where the customer first makes an investment in a platform. For example, once you buy a razor you have a vested interest in buying compatible blades.

No. 4: Renewable subscriptions (e.g., magazines)

Typically, subscriptions are paid for in advance, creating a positive cash-flow cycle.

No. 3: Sunk-money renewable subscriptions (e.g., the Bloomberg Terminal)

Traders and money managers swear by their Bloomberg Terminal; and they have to first buy or lease the terminal in order to subscribe to Bloomberg’s financial information.

No. 2: Automatic-renewal subscriptions (e.g., document storage)

When you store documents with Iron Mountain, you are automatically charged a fee each month as long as you continue to use the service.

No. 1: Contracts (e.g., wireless phones)

As much as we may despise being tied to them, wireless companies have mastered the art of recurring revenue. Many give customers free phones if they lock into a two or three-year contract.

When you put your business up for sale, you’re selling the future, not just the present. So if you don’t have a recurring revenue stream, consider how best to create one, given your type of business. It will increase the predictability of your revenue, the value of your business, and the interest of potential acquirers as they look to the future.

Even if you are not ready to sell your business now, by implementing these strategies now you can begin to enjoy the fruits of your labor now as you begin to position yourself for the future.

See how valuable your business is not by getting your own Sellability Score, and see how you compare on the eight key drivers of valuability and thus sellability, by taking our 13-minute survey here at www.actioncooachsellabilityscore.com