How to make your company irresistible to potential buyers
One of the biggest factors in determining the value of your company is the extent to which an acquirer can see where your sales will come from in the future. Business purchasers are buying future income and growth. The more predictable your income, the higher you will sit in the value range.
If you’re in a business that starts from scratch each month, the value of your company will be lower than if you can demonstrate the source or sources of your future revenue. A recurring revenue stream acts like a powerful pair of binoculars for you – and your potential acquirer – to see months or years into the future; creating an annuity stream is the best way to increase the desirability and value of your company.
The surer your future revenue is, the higher the value the market will place on your business.
Recurring revenue models ranked by buyer interest
Here is the hierarchy of recurring revenue presented from least to most valuable in the eyes of an acquirer.
No. 6: Consumables (e.g., shampoo, toothpaste)
These are disposable items that customers purchase regularly, but they have no particular motivation to repurchase from a single seller or remain brand loyal.
No. 5: Sunk-money consumables (e.g., razor blades)
This is where the customer first invests in a platform. For example, once you buy a razor, you have a vested interest in buying compatible blades.
No. 4: Renewable subscriptions (e.g., magazines)
Typically, subscriptions are paid in advance, creating a positive cash flow cycle.
No. 3: Sunk-money renewable subscriptions (e.g., the Bloomberg Terminal)
Traders and money managers swear by their Bloomberg Terminal, and they must first buy or lease it to subscribe to Bloomberg’s financial information.
No. 2: Automatic-renewal subscriptions (e.g., document storage)
When you store documents with Iron Mountain, you are automatically charged a fee each month as long as you continue to use the service.
No. 1: Contracts (e.g., wireless phones)
As much as we may despise being tied to them, wireless companies have mastered the art of recurring revenue. Many give customers free phones if they lock into a two or three-year contract.
Maximizing your business value
When you put your business up for sale, you’re selling the future, not just the present. So if you don’t have a recurring revenue stream, consider how best to create one, given your type of business. It will increase the predictability of your revenue, the value of your business, and the interest of potential acquirers as they look ahead.
