Recurring Revenue

The key role of recurring revenue in your company valuation

Recurring revenues lower the perceived risk of a business purchase and help to demonstrate to potential buyers that earnings will continue to be predictable after the sale, raising your company valuation.

Anyone who has led a business will know that new sales are often costly, unpredictable, and time-consuming.

That’s why, when the time comes to sell your business, those businesses that can show a high level of consistent and sustainable recurring revenues from customers, typically through subscriptions or long-term contracts of more than 12 months, will achieve a higher multiple and a higher company valuation.

Recurring revenues lower the perceived risk of a business purchase and help to demonstrate to investors that earnings will continue to be predictable into the future.

If you have to consistently bid for work or rely on infrequent, serendipitous sales, then your business will not be valued as highly.

Strong clients relationships are essential

Questions

It goes without saying that strong client relationships are vital to generating repeat business.

That’s why you will need to demonstrate to any potential buyer that you put as much effort into client account management and retaining clients as you do into generating new sales.

You need to show that you have a process for managing client accounts, for looking after key client stakeholders, for identifying client concerns, and crucially, for showing how you plan to increase the revenue per client in the future.

You also need to show that you are committed to, and have robust processes in place for monitoring, maintaining, and improving customer service.

What questions will a prospective buyer ask you about your recurring revenues?

If you can answer the following questions with confidence, when it comes to selling your business, you will achieve a significantly higher valuation:

  • How satisfied are your clients? Do you know your net promoter score?
  • How many of your customers renew their contracts with you?
  • Do you have a high level of repeat business? What is your churn rate?
  • Do you rely on faith that each customer will work with you again in the future?
  • What percentage of your revenue is made up of new clients and existing clients?
  • How much of your work consists of individual bids, pitches and/or tenders?
  • What Client Relationship Management (CRM) system do you use? How often is your CRM used by employees?
  • How many of your customers are signed up to long term, multi-year contracts? What is the average lifetime value of your clients?

Thinking about selling your business? Contact our Corporate Finance experts

If you’re considering selling your business or securing an exit in the next few months or in the coming years, Leonherman can help you. Contact us today to find out about our Corporate Finance services and to speak to one of our advisers.

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