Find the recurring revenue Holy Grail
Almost all business owners know they want recurring revenue and know they should have it, but how many of them actually try hard enough to get it? There are some key challenges that companies and owners must face when trying to reshape their revenue structure, and trust me it’s worth it!
But why is recurring revenue so important anyway?
There are many reasons, but we’ll begin with the most obvious one… your company is worth more to a buyer if there is a guarantee of future revenue. Just ask yourself… would you rather buy a company that has revenue automatically coming in each month or one where you have to go out and get it each month?
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Guaranteed value
The multiple, applied to pre-tax income, on the offer to buy a company with a healthy amount of recurring contracts is almost always going to be higher than a company that is more reliant on large, one-off transactions. Think transferable value. If someone were to take your spot tomorrow, how difficult would it be to keep the monthly revenue and profits flowing?
Wake up, get paid
Putting aside the sale value of the business, just think of how much easier day-to-day business becomes when you’ve got recurring revenue. It’s basically a way of running a business on autopilot. Every time you wake up, you get paid. Who wouldn’t want that?!
[clickToTweet tweet=”Recurring revenue is the best kind of revenue! Set your company on autopilot!” quote=”Waking up and getting paid the 1st of every month is the best!”]
Of course it is one thing to aim for more recurring revenue, but it is another thing to actually go out and get it. Below we will outline the most common hurdles that business owners face when chasing the idea of recurring revenue, and how best to overcome them:
Hurdle 1: Mindset
Get out of that mindset that says “it’s not possible in my industry”. You can bet your life that it’s possible in any industry. Doesn’t mean that it’s easy, but if you think laterally enough, you can find it.
[clickToTweet tweet=”5x the value of your business by adding recurring revenue! @valuebuilder @ryantansom” quote=”Commit to changing your mindset! Add recurring revenue today!”]
PERFECT EXAMPLE: Take a look at the flower business… terrible industry to build transferable value. 30% of your revenue comes from 2 holidays, 50% of your inventory dies each month, your customers have to walk by your expensive store to find you, and you don’t know what they will buy. Rinse and repeat ever month!
However… H. Bloom took that business model and mindset and shoved it in the trash. They took an antiquated industry and flipped it on its head by growing their company to $7.2 Million with 54 employees in just 5 years. Read more below in hurdle 5 to see what they did.
Hurdle 2: Financials
You really need to look at your balance sheet differently. Let’s take the purely fictitious example of an IT company that might earn $300,000 from a full upgrade of a client’s systems. As much as this might be healthy in the short term (adding 300k in revenue for that quarter), it would be better for the long-term health of the company to spread the revenue over a longer period.
How could this be done? Perhaps by changing the billing to be x amount of dollars per user, and selling it as an all-inclusive service that includes all support and upgrades. $200 per user across 500 users in the company would give $10,000 per month in revenue. Although it will take in between two and three years to get to the $300,000 figure, this change of approach could be worth its weight in gold further down the line.
If the business was to be sold using the original model of revenue, the seller would probably be offered a 1-2 multiple of pre-tax income, but using the second model could expect a 5-7 multiple. Even if the amount of money earned is the same or even less using the latter scenario, you can see just how valuable this equation can be if you get it right.
Hurdle 3: Cashflow
Of course, the above scenario is simply not possible if you need $300,000 every quarter in order to pay your bills! You cannot simply ignore day-to-day business in chasing a long-term goal of a higher potential sale value. However, if you plan well enough, you can gradually get over this hurdle. Incremental change is possible! Maybe your existing clients wouldn’t be open to a change (because they are not repeat customers or you just trained them into bad habits!) or maybe your cashflow couldn’t handle it even if they were interested, but what about pitching a recurring revenue deal to new clients? There is bound to be a transition period here – perhaps a very lengthy one – but one that you really shouldn’t put off.
Hurdle 4: Compensation
When I began the transition to recurring revenue with our previous family business, I completely underestimated about what effect this could have on my sales team. I was so happy that I’d started the process of building the value of our business (the right way) that I was completely oblivious to the fact that my sales team, heavily reliant on transactional gross profit commission, would take a massive hit in the short term. I nearly caused a riot! And it’s no surprise really. You try asking a salesperson who’s used to selling something and immediately receiving a $20,000 commission on a $300,000 sale to then accept 500 bucks a month for 3 years!
So I had to create a solution that involved incentivizing the sales team on overall company performance as well as per transaction, and spend a lot of time making the case for why this method of raising revenue was better in the long term. Successfully negotiating this hurdle goes back to basic change management. It’s not always easy – especially if you do it the way I did it – but it is certainly achievable. Sales teams want to make money just as much as you do, so if you put the right package together, you’ll get them on board.
Hurdle 5: Find the recurring revenue streams
If you sift those streams long enough you’ll find gold! Easier said than done, but you’ll find it in there somewhere.
H.Bloom took a look at the flower industry and asked themselves one very important question, “who buys flowers each week consistently?” What they found was corporations, hotels, and places like restaurants buy the same flowers every week. They brought the average industry client value of $29 for a bouquet of flowers to their average lifetime value of a customer of $4,000. They had clients that were spending upwards of $5,000 per week pre-ordering the same flowers. Pretty damn good idea huh!?
The answer seems obvious to all of us now but it took a completely different way of looking at things to make it all happen. Tell us your industry and why you don’t think it’s possible, or leave a note to give us your ideas for your vision!