Many owners will have to boost the value of their businesses before they transition them to new owners. Most often this is because if the owners sell today, they will not net enough money from the transition, after taxes and fees, to fund the rest of their lives. It may be also 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 eight key drivers of business value, three of which include increasing revenue and 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. Examples include:
- Service or maintenance agreements
- Consumable product or replacement part contracts
- Subscriptions for products, services or information
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.
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 include:
- Makes your customer relationships “sticky” so it’s harder for them to leave you
- Increases the lifetime value of customers – subscription customers buy more add-on products and services
- Smoothes out demand for your products and services so it’s easier for you to operate
- Recession-proofs the business
- Improves 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 but it will likely require that owners think “outside the box” or how they have 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. They must grow or face financial and other unpleasant consequences.
Employees and family members are counting 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.Business & Finance Articles on Business 2 Community