Value Builder Driver #5: Recurring Revenue

Episode Summary:
In this episode, Pete Mohr shares why recurring revenue is the secret to building a valuable and sellable business. Learn the different types of recurring revenue, from repeat customers to subscription models, and how they impact your bottom line. Pete outlines the hierarchy of recurring revenue, explaining how each level reduces risk, creates predictable income, and boosts your business's appeal to potential buyers.

Key Takeaways:
→ Recurring revenue minimizes risk and maximizes buyer confidence.
→ Higher levels of recurring revenue lead to higher valuations.
→ Practical ways to implement subscriptions, contracts, and memberships.
→ Tips for transitioning your business to include recurring revenue streams.

Resources Mentioned:
→ Take the Value Builder Assessment: TheExitReadyBusiness.com

About the Host:
Pete Mohr is a Certified Exit Planning Associate and Accredited Value Guide dedicated to helping business owners grow their companies’ worth while achieving personal freedom. Through the Business Owner Breakthrough Podcast, Pete provides actionable strategies to build value-driven businesses that work without their owners.

Are you looking to make some changes in your business and your life in 2024?  Head over to speaktopete.com and book a chat with me to see if we're the right fit!

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Don’t leave your business’s future to chance. Click here to take the Value Builder Assessment and start building a more valuable, resilient business today!

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Pete's Websites:

Pete-Mohr.com
The Exit Ready Business
Kolbe Coach
Simplifying Entrepreneurship

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Transcript

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Welcome back to another edition of the Business Owner Breakthrough podcast. In the last episode, we covered the valuation teeter totter. It's part of our Value Builder series. That was number four. Today we're going to talk about number five of the eight key drivers to building value in your business. And it's all around recurring revenue. It's truly what separates a highly valuable business from a risky one. People want that confidence that the money is going to keep rolling in, right? Why is recurring revenue such a valuable thing? It's really because it's the income that your business can count on regularly without having to start from scratch each month, without having to go and find a new client, without having to send your sales force out or to do all sorts of marketing to bring the next person in. And some of the examples of good recurring revenue models would be subscription based contracts, retainer based services, all of these sort of things where it's really adding clarity around the fact that you will have money continuing to come in. It really reduces the risk for a potential buyer because it provides this predictable, consistent cash flow and it gives them super amounts of confidence that the business can continue to generate income even after the current owner leaves. And that's so important in the valuation of your business because businesses with recurring revenue typically receive higher valuations because the buyers know they'll have that stable income. Not all recurring revenue is the same. So we're going to talk a little bit about what we call the high hierarchy of recurring revenue, because there's different levels of recurring revenue from the least valuable to the most valuable. And I think, you know, one of the ones, the least valuable, of course, is not having any traceable recurring revenue. Every sale starts from zero each month, leading to unpredictable income. And that's not too enticing as far as the valuation of your business. The next piece is repeat customers and some consistency from the customers who make regular purchase but with no formal commitment. And most of you know that we, our retailers at Shootopia, one of the things we do is monitor that particular thing because we can't contractually bind people into buying their shoes from us. But we do have really good knowledge and understanding around who our repeat customers are and how many dollars of our year are given to us by those repeat customers. When we look at it, we actually have percentages and in most cases we're in around that, depending on the season, and around that, 60 to 70% of our client base is coming back for second and third or 12th purchases, whatever the case is. So we can actually show that and that provides more valuable information to a potential buyer than let's say if we just rung things up through a cash register and we couldn't prove that we had these returning customers. The next step is service contracts and customers commit to paying for ongoing services. And one of our former businesses was a cleaning service and we had service contracts based that we would go in and sanitize washroom facilities in a variety about 300 or so locations on a weekly basis. So that recurring revenue with service contracts, very important piece when you go to sell, you could see how that valuable that is, right? Number four is the subscription model. So regular automatic payments for customers like memberships, monthly memberships, let's say that you had a business, musical instrument business or a dance school business whereby you have lessons and you just sort of automatically withdraw those monies for a monthly service that they're coming in for lessons of some sort or whatever the case may be, the last one being, and the most valuable hard contracts where customers sign long term agreements ensuring really a steady income for a period of time. And if you think of that, one of the ones that pops to my mind anyway is phones. So if you got a new phone and they lock you down for one or two or five years, whatever the case is, or maybe it's a cable contract or maybe, you know, all of these different things. If you had your electrical services or your natural gas services services to your house where you're locked in for a given period of time, that's a hard contract and it's very valuable in the, you know, putting the valuation behind those numbers. And it's something that people can count on. So moving up this hierarchy really increases the predictability of revenue and which makes the business more attractive to buyers. So maybe you say to yourself, well, I don't have any recurring revenue, but you probably do. And you just have to start thinking about how you can frame it up to present it to someone, a banker, a potential buyer, whatever the case is. And if you really you don't, then you need to start thinking about how you could potentially introduce a subscription or a membership model. You know, like I had used the example of a music store. Well, maybe the music store starts creating one of the two or three offices in the back and they start having teaching lessons at the back to create these membership models. Right. Think of ways that your business can offer ongoing services or products that the customers pay for regularly. A retail store might offer loyalty membership programs or exclusive benefits, or a local coffee shop might have the coffee of the month. Service businesses might offer a subscription for regular maintenance, let's say carpet cleaning in the winter months. Whatever the case may be, there's lots of ways to do it. And what you need to do is really understand how much of your business is in this model so that you can carve it out and explain it to a potential new person looking at your business, because that's where you're going to drive the valuation up. Step two would be to create long term contracts with customers. Offer incentives for customers to commit to longer agreements if they can, discounted pricing if they take a 12 month contract, or if they buy well in advance so that they're pre buying their buy, let's say for the following six month period where it's already bought and paid for for six months down the road. Those kind of things offer real value. Step number three would be to offer maintenance or service contracts. And if your business provides equipment or technology, this is a great piece of where you might do it. Think of all those softwares out there that are on a month to month basis that just keep rolling over and over and over, whether it's a payroll platform, maybe it's some of the apps on your phone, whatever the case is, and the last piece. So step four would be to develop a consumable product. And getting back to that coffee idea, if you think about all of the different people that use coffee in their offices, and let's say you set up that Keurig machine or the Tassimo machine or whatever the variety of different machines that are out there and you're selling those coffee pucks, it's a consumable product that they'll keep buying over and over and over again. So if you can create these products that customers regularly use for your business and reorder ensuring consistent sales over time, that's really going to help your valuation. Buyers are often willing to pay significantly more for businesses that have these built in revenue streams because these businesses require less effort to maintain sales, less marketing dollars, less sales dollars, it's just recurring revenue and it becomes more of a service facility. Right. So where does your business stand on this hierarchy of recurring revenue? Are you relying too much on one off sales? Your sales actually have a predictable revenue stream and if they do, how are you classifying and categorizing them and making them visible to anyone else, whether it's a banker or a buyer or whatever the case is. Having these things is going to give them a lot more confidence in your business. So if you'd like to know a little bit more about the hierarchy of recurring revenue and all of the things we've been talking about here on the Value Builder series. Just head on over to theexitreadybusiness.com and take the value builder assessment. It's right there, big green button right on the first slide and it's going to take you about half an hour or so to do that, maybe a little bit less, but it's going to help you get a clear view of your business's recurring revenue potential. Along with all the other eight key drivers. We'll hop on a quick call, go through it together so that we can set up a plan for you to increase the value of your business because you know you deserve it. You got into business to have a better life and building value in your business, not just top line revenue, but building actual value value in your business will help you get there. So head on over to theexitreadybusiness.com and click that blue green button that says Value Builder Assessment and let's hop on a call. It's absolutely free to you for about half an hour. We'll get on that chat, have a conversation and go over it all. Next week we're going to dig into another key driver of the Value Builder assessment and it's called monopoly control. I think you can guess what it is, but it's all around positioning your business as a leader in a niche market that can dramatically boost its value. So until next time, make it a great day.