Exit Coach Bill Black interviews Top Advisors for Tips, Ideas & Precautions for Business Owners who want to grow and protect their company value and plan for a successful Business Sale or Transfer. Listen daily so you can be well-planned!
Episodes
Saturday Apr 26, 2014
Saturday Apr 26, 2014
By
Bill Black
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. 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. 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 one seller or to be brand loyal.
No.
5: Sunk-money consumables (e.g., razor blades)
This
is where the customer first makes an investment 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 for 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 have to first
buy or lease the terminal in order 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.
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 to the future.