Will this be the year you drive up the value of your business?

Will this be the year you drive up the value of your business?

If you have resolved to make your company more valuable over the next year, you may want to consider how your customers pay.

If you have a transaction business model where customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).

By contrast, if you have a recurring revenue model, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue.

Breedlove & Associates Sells for 6x Revenue 

Stephanie Breedlove started a payroll company to make it easier for parents to pay their nannies on a recurring basis. It began small and Breedlove self-funded her growth, which averaged 20% per year.

10 years on, Breedlove & Associates had hit $9 million in annual sales when Breedlove accepted an offer from Care.com of $55 million for her business—representing an astronomical multiple of more than six times Breedlove’s revenue.

Buyers pay up for companies with recurring revenue because they can clearly see how your company will make money long after you hit the exit.

Not sure how to create recurring revenue? Here are four models to consider:

Products That Run Out

If you have a product that people run out of, consider offering it on a subscription. Australian online retailer Amazon.com.au sells nappy subscriptions for busy parents who don’t have the time (or interest) in running to the store to re-stock on Huggies. Dollar Shave Club, which was acquired by Unilever back in 2016 for five times revenue (and recently sold again to Nexus Capital Management), sells razor blades on subscription.  Koala Eco sells plant-based, non-toxic household cleaning products to environmentally conscious consumers and a large percentage of their sales come from subscriptions.

Membership Websites

If you’re a consultant and offer specialised advice, consider whether customers might pay access to a premium membership website where you offer your know-how to subscribers only. Today, there are membership websites for people who want to know about anything from Search Engine Marketing to running a restaurant.

Services Contracts

If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business.

Piggyback Services

Ask yourself what your “one-off” customers buy after they buy what you sell. For example, if you make a company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on a subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service.

Rentals

If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. Carly Car subscribers can have access to a car when they need it without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to the company’s co-working space without buying a building or committing to a long-term lease.

You don’t have to be a software company to create customers who pay you automatically each month. There is no faster way to improve the value of your business this year than to add some recurring revenue.

Take our Value Builder Score Questionnaire to get your Value Builder Score, measuring how your business compares on recurring revenue as well as the other key drivers of business value.