Looking to increase the value of your business this year?
If you have resolved to drive up your business value, you may want to start by thinking hard about how your customers pay.
Transaction business models, where customers pay once for what they buy, essentially create company values in single-digit multiples 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 NOT profits…
How one business sold for 6x its revenue.
In 1992, 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 percent per year.
By 2012, Breedlove & Associates had hit $9 million in annual sales. Then Breedlove accepted an offer from Care.com for her business. The $55 million offer represented an astronomical multiple of more than six times Breedlove’s revenue!
Buyers pay up for companies with recurring revenue. The do this because they can clearly see how the company will make money long after the boss exits it.
How can you increase the value of your business by turning it into a recurring revenue machine? Here are five models to consider:
1. Subscriptions for products that run out
If you sell products that people run out of and need to replace regularly, consider offering it on subscription:
- The retailing giant Target sells subscriptions to nappies for busy parents who don’t have the time (or interest) in running to the store to re-stock;
- Dollar Shave Club, which was recently acquired by Unilever for five times its revenue, sells razor blades on subscription;
- The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers. More than 80 percent of their sales come from subscriptions.
2. Create a membership website
If you’re a consultant offering specialised advice, consider whether customers might pay for 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.
3. Provide services contracts
If you bill by the hour or by project, consider moving to a fixed monthly fee for your service.
Marketing agency GoBrandGo! has done this to provide steady cash flow and create a more predictable service business. This has driven up its value.
4. Piggyback services
Ask yourself what your ‘one-off’ customers buy after they have bought what you sell.
For example, if you create a brand new website for a client, 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 subscription.
If you offer interior design, your customers probably want to keep their home looking like the day you presented your design. To do this, they might be in the market for a regular cleaning service.
5. Offer rentals
If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe:
- ZipCar subscribers get access to a car when they need it without forking out the cash to buy a hunk of steel;
- WeWork subscribers get access to the company’s co-working space without buying a building or committing to a long-term lease.
How are you going to increase the value of YOUR business?
There is simply no faster way to increase the value of your business than to add some recurring revenue. And you don’t have to be a software or utility company for customers to pay you automatically each month.
We’d be happy to show you how you can create recurring revenue with a simple framework and a few great tools. Book in a discovery call with us to understand how your business is going at the moment. We can help you to improve to drive future success and increase value. Check out our Business Valuation Calculator to understand more.