Internet Radio Show | 21st Century Entrepreneur: Create Passive Income and Recurring Revenue in Your Business | Aired November 7 at 12 Noon.
This Friday November 7th we will be airing another program of the “21st Century Entrepreneur” which is an Internet radio program aimed towards educating business owners and their advisors on how to make their businesses more successful and profitable. It is a show hosted by JC Maldonado who is the CEO of BizGro Partners, a Business Development Firm that helps small and midsize companies grow, expand, and transition. This week we will be discussing the importance of “Recurring Revenue” in business and its potential positive impacts. Below is a blog discussing the importance of recurring revenue and how it can increase a business’s enterprise value. Finally, last week we aired a show on making money with Linkedin. We interviewed Brynne Tillman who is considered to be one of the country’s true experts on modern day “Social Selling.” To hear a recorded version of the show, click on the LED Screen icon below:
You Want to Increase your Business’s Enterprise Value: It’s All About Recurring Revenue.
The other day one of our clients asked me “what is the one thing I can do, to increase the value of my business, so that I can exit and sell in two years for the highest value possible.” When I heard the question I began to conceptualize some theories. I first thought to myself, “you need to get your financials in order.” Then I thought, “you have to spread your revenue amongst a wide range of customers, products, salespeople and not be too dependent on any one person or entity in order to generate profit including the owners themselves.” A third thought came to mind: ‘You have to make sure the key people stay so that the buyer inherits the income generating potential of the business.” Finally, I said to myself, “sell when sales are on an upward trend.” All of these thoughts had credence and are key components to making a business a valuable enterprise. Nevertheless, I never shared any of my initial thoughts with my client because after all these thoughts raced into my mind, the number one value enhancer of them all came to mind: “Recurring Revenue.” “You have to create, generate, maintain, and book recurring revenue,” I said to my client. “Without recurring revenue, you cannot sell the business for a premium price in the market.”
What Is Recurring Revenue?
Recurring revenue is sales generated by customers that are paid on a daily, weekly, monthly, quarterly, or even annual basis. The one characteristic of recurring revenue is ongoing timely payments or orders from customers over long extended periods of time, typically for 5 years or longer and in some cases 10 years or longer. In some cases, recurring revenue can be substantiated for decades. Just picture in your mind, your business owning customers that pay all the time consistently on a perpetual basis for years. Further, picture these same customers becoming totally dependent on your business leaving client retention being the number one core strength of your business. The opposite of recurring revenue would be project based income where your business receives compensation from a client one time and that client probably will not rehire you consistently for ongoing service or pay for products ongoing. Although project based income typically results in bulk revenue, the challenge results in the fact that project based income is not recurring and cannot be depended upon to generate profits in the long term.
How Does Recurring Revenue Affect a Business’s Enterprise Value?
Recurring revenue spirals a business’s enterprise value upward because it is income easily identified on a financial statement and it can be relied upon in the future to cover expenses, pay debt service, and produce profits. Its reliability enables a 3rd party buyer to pay a little more for the business and not get hurt because the buyer knows that even if he/she has trouble growing the business, the existing business can be depended upon for survival. Recurring revenue also represents revenue that can be transferred to a 3rd party buyer with ease. The ability to transfer income will motivate a buyer to pay more money upfront for the purchase as opposed to relying on terms that make part of the purchase price dependent on future outcomes regarding the transfer of business; revenue from customers that is not recurring revenue in nature cannot be relied upon in the future unless the buyer successfully retains that business.
Examples of Recurring Revenue Businesses:
There are many businesses with a recurring revenue models amongst retail and B2B businesses. Your local grocery store or car wash has recurring customers from the areas they service. However, traditional retail businesses are limited by the retail area they service. Certain E-Commerce related businesses can also benefit from recurring revenue if they sell to customers who have to re-order the products they buy on an ongoing basis. And in this case, their retail community is unlimited if the company markets itself properly. Finally, certain B2B businesses, particularly those that sell commodity items benefit from recurring revenue models. Examples of these businesses are food & beverage distributors, coffee distributors, many healthcare related entities, and many manufacturers.
The Ultimate Recurring Revenue Company:
The ultimate recurring revenue businesses are companies that license out their intellectual property (IP). If you own a product or service that is patented, trademarked, franchised, licensed and the like, and you can build a network of entities or individuals to become dependent on your IP and collect licensing fees and royalties for the use of your IP, then you are in the ultimate recurring revenue model business. Most larger outfits producing over $100,000,000+ in revenue are in the IP distribution business. These companies include software companies, music record labels, publishing outfits, media companies, franchises, and sports teams. What separates IP companies from the Retail, E-Commerce, and B2B companies is the dependency the IP’s customers have on the IP itself. This gives the IP company incredible leverage, stability, and growth opportunity. The IP oriented company is typically not selling a commodity and even if a commodity is being sold, that commodity is being sold under the protective shield of a name recognized brand. This dependency solidifies the recurring revenue component of the IP business and eventually yields that IP company an incredible amount of enterprise value.
If you want to learn more about establishing more recurring revenue in your business call 201-496-6931 or email us at firstname.lastname@example.org.