Early on in my career as a business broker, I discovered that businesses with recurring revenues tended to sell at dramatically higher valuation multiples than comparable businesses without. Let’s take a look at some of the benefits of having all or a substantial portion of your sales coming in as recurring monthly revenue (“RMR”) or repeat sales to the same batch of customers.
Recurring Revenues Stabilize Cash Flows
With most RMR models your customers are set up to pay you on the same day every month. Think of your cable, cell plan, and ISP bills. Either you pay them on the specified date or you are considered in arrears. There’s no more stretching out payments for 60, 90, or 120 days. This is a big part of the reason so Silicon Valley has been so hot about saas type ventures.
Recurring Revenues Make Forecasting Simpler
With non-recurring revenue models your sales are reset to zero at the beginning of every month and you have to start all over again. After a while you can begin to feel like Sisyphus constantly toiling to get the rock back up the hill. With a RMR model you can rest assured that the new month will be pretty much like the last one plus some new sales.
Recurring Revenues Make Selling Easier
Not everyone is a great salesman. Indeed most people are not. I include myself in that group. RMRs make life easier for people like myself. Here’s how. With the traditional model you start over from zero every month. I have a friends in big ticket sales who sales experience slumps regularly. If the slump lasts more than a week, they can get panicky. With a RMR model slumps are pretty much eliminated as long as you keep your existing customers happy. If you’re like me, you will find it a lot less stressful if the bulk of your time is devoted to quality control and improvement of services and products than prospecting, cold-calling, and selling.
Recurring Revenue Businesses Sell For More
The biggest pay day you are likely to ever have with your business is the day you sell it. As I noted above, if you take two comparable businesses and one has some RMR while the other doesn’t, the former will sell for substantially more because buyers are attracted to businesses with fairly steady and predictable sales. (And besides that, no one wants to feel like Sisyphus.)
These are just a few of the benefits of having recurring revenues for your business. See my other post here on the ways you can create them. If you find this topic of interest please hit Follow as I will write more about RMRs.