What changes have you made to make your company more valuable in 2017? Our suggestion, you may want to think hard about how your customers pay. If you’ve been following our blog, you’ll know recurring revenue is a topic we cover time and time again. It’s not that we have no other methods for improving your company’s value. We push it because we know adding a recurring revenue source is hands-down the fastest way to improve the value of your company.
If your company uses a transactional business model where customers pay once for what they buy, expect a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA). Transactional business models are essential to and will continue to be a necessity for most companies. However, with 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.
We aren’t suggesting your company leave its transactional models behind. Try implementing a hybrid of transactional and recurring payment methods. If you’re still unsure, keep reading to discover how other companies have found success in these revised methods.
Breedlove & Associates Sells for 6X Revenue
In 1992, Stephanie Breedlove started a payroll company to make it easier for families to pay their nannies on a recurring basis. It began small and Breedlove self-funded her growth, which averaged 20% per year.
By 2012, Breedlove & Associates had hit $9 million in annual sales. That year, Breedlove accepted an offer from Care.com of $55 million for her business—representing an astronomical multiple of more than six times the company’s revenue.
Why do buyers pay more for companies with recurring revenue? It’s simple … 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:
1. Products That Run Out
If you have a product that people run out of, such as toilet paper and toothpaste, consider offering it on subscription. Retail giant, Target, sells diaper subscriptions to busy parents who don’t have time (or energy) to run to the store for Pampers. Dollar Shave Club, which was recently acquired by Unilever for five times its revenue, sells razor blades on subscription. The Honest Company sells household products to environmentally conscious consumers. More than 80% of its sales come from subscriptions.
2. Membership Websites
If you’re a consultant offering specialized advice, consider whether customers would pay to access a 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.
3. Services Contracts
Whether you bill by the hour or per project, consider moving to a fixed monthly fee for your service. The marketing agency, GoBrandGo!, has done this to steady cash flow and create a more predictable service business.
If you offer something expensive that customers only need on occasion, consider renting access to it for subscribers. ZipCar subscribers have access to a car when they need it without having to purchase their own vehicle. WeWork subscribers can access to the company’s co-working space without buying a building or committing to a long-term lease.
Recurring revenue methods are no longer restricted to software companies and gym memberships. How can your business implement a recurring revenue source, start on the fast track towards dramatically improving its value and make 2017 it’s defining year?