If you have resolved to make your company more valuable in 2018, you may want to think hard about how your customers pay.
If you have a transaction business model, a model in which customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA). By contrast, if you have a recurring revenue model, a model in which customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue.
Breedlove & Associates Sells for 6X 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, with Breedlove self-funding the company’s growth, which averaged 20% per year.
By 2012, Breedlove & Associates reached $9 million in annual sales. That same year Breedlove accepted a $55 million offer from Care.com for her business,an astronomical multiple of more than six times Breedlove’s revenue.
Buyers will pay more for companies with opportunities for recurring revenue because they can clearly see how your company will make money long after you leave the business.
Not sure how to create recurring revenue? Here are four models to consider:
Products That Run Out
If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time for (or interest in) running to the store to re-stock on Pampers. 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% of their sales come from subscriptions.
If you’re a consultant and offer specialized advice, consider whether customers might pay to access a premium membership website where you offer your know-how to subscribers only. Today there are membership websites for people to learn about everything from search engine marketing to running a restaurant.
If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business.
Ask yourself what your “one-off” customers buy after they purchase your product. . For example, if you build a y a new website for a companythey are probably 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, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service.
If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. ZipCar subscribers can have access to a car when they need it without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to the company’s shared work spaces without buying a building or committing to a long-term lease.
You don’t have to be a software company to create customers who pay you automatically each month. There is simply no faster way to improve the value of your business this year than to add some recurring revenue.
Credit: Foresight CFO