How different types of sale can make your company irresistible to potential buyers.
One of the biggest drivers in determining the value of your company is the reliability of your future sales. When you started your business, when new sales had to be generated from scratch each month, you probably realised that the value of your company was low. As you grew and secured more reliable customers and understood their likely future spending, you probably felt better about your business and also its value. A recurring revenue stream acts like a powerful pair of binoculars for you – and your potential acquirer – to see months or years into the future. Creating a regular income stream is about being more in control of not only your customers spending, but how often they spend.
The more secure your future revenue is, the higher the value the market will place on your business and below is what we call “The hierarchy of recurring revenue”, presented from least to most valuable, in the eyes of an acquirer.
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. Often price led purchases, where an offer can overcome brand loyalty.
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 brands razor handle you have a vested interest in buying compatible razor blades. At home I have cling film and air freshener dispensers. Such examples are everywhere.
No. 4: Renewable subscriptions (e.g. magazines)
Typically, subscriptions are paid for in advance, creating a positive cash-flow cycle. Often offer led (e.g. free issues), but in return for a commitment and a direct debit;
No. 3: Sunk-money renewable subscriptions (e.g. the Bloomberg Terminal)
Traders and money managers swear by their Bloomberg Terminal. They first buy or lease the terminal and then subscribe to Bloomberg’s financial information. Bloomberg then “owns” the customer and controls how often the customer buys.
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. Relying on customer inertia valued WhatApp at $19bn, all based on annual micro payments.
No. 1: Contracts (e.g. mobile phones)
As much as we may despise being tied to them, mobile companies have mastered the art of recurring revenue. Many give customers free phones to lock you into a two or three-year contract and that direct debit again!
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.
The Business Partnership, have been helping business owners sell their businesses since 1979. You can learn more about The Business Partnership here.