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How Recurring Revenue Can Positively Affect a Business's Value


A company’s business model can greatly affect its overall value. One of the biggest factors buyers are looking for in a business is stability.  More specifically,  can the company maintain sales at a consistent rate? One of the biggest key indicators that will help buyers evaluate a business’s success rate in the future is its business model and revenue stream(s). The most attractive type of revenue model for buyers is the recurring revenue business model. 

A recurring revenue model is the method in which a business provides access to a product or service in exchange for regularly scheduled payments. Subscription services and memberships are well-known types of recurring revenue business models. Netflix for example provides its library of movies and tv shows for a monthly subscription. Almost any industry can allow a recurring revenue model. The four biggest categories of recurring revenue models are consumables (eg. razors and blades), subscriptions, transactions (eg. sharing economies like Uber), and rentals (eg. leases). 

Business buyers appreciate the low risk nature of a recurring revenue stream. It’s the best factor to predict future positive revenue as it almost guarantees that most customers will need to pay their scheduled fee to keep using the product or service. Buyers can therefore receive instant return on their investment without making any major changes. A company whose main source of revenue comes from a recurring revenue stream will have a higher valuation than one that doesn’t, even if both companies are nearly otherwise identical. For example,
software companies can see their value double through recurring revenue streams.

There are several methods for a business to implement recurring revenue streams. For example, loyalty programs where customers receive incentives to purchase more frequently.  This type is often used at major retail and fast food businesses.  Other examples include service contracts, support contracts, white labelling, etc. If time is of the essence to sell, helping buyers conceptualize the opportunity of how your company is capable of successfully implementing a recurring revenue model may be effective.