How to Unlock Your Company’s Potential with a Strong Stream of Recurring Revenue?

The importance of recurring revenue in determining the value of a company cannot be overstated. The more an acquirer can see where a company’s future sales will come from, the higher the value they will place on the business. A recurring revenue stream acts as a way to predict future sales, making a company more desirable and valuable to potential buyers.

Here’s a hierarchy of recurring revenue, from least to most valuable in the eyes of an acquirer:

  • Consumables: These are products that customers purchase regularly but have no particular brand loyalty, such as shampoo or toothpaste.
  • Sunk-money consumables: Products that require an initial investment, such as razor blades, where customers have a vested interest in purchasing compatible products.
  • Renewable subscriptions: Paid in advance, such as magazines, creating a positive cash-flow cycle.
  • Sunk-money renewable subscriptions: Products that require an initial investment, such as the Bloomberg Terminal, where customers must first purchase or lease the platform to subscribe to its services.
  • Automatic-renewal subscriptions: Services that automatically charge customers as long as they continue to use the service, such as document storage with Iron Mountain.
  • Contracts: The most valuable type of recurring revenue, such as wireless phone contracts, where customers are tied into a long-term agreement in exchange for a free phone.

When putting a business up for sale, the focus is on the future, not just the present. If a company does not have a recurring revenue stream, it’s important to find a way to create one, given the type of business. This will increase the predictability of future revenue, the value of the business, and the interest of potential acquirers.

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Pay Less Tax

A great small business tax accountant does more than just measure value, they create it. At CPA4IT our goal is to save you substantially more than it costs you for our services. Over the last 30 years we have developed tax strategies designed to help you keep more of your hard earned money. If you would like to learn how we can help you pay less tax, simply download our FREE Guide to Pay Less Tax.