If you have resolved to make your company more valuable in 2017, you may
want to think hard about how your customers pay.
If you have a transaction business model where customers pay once for what
they buy and do not return, expect your company’s value to be a low single-digit multiple of your
Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).
If you have a recurring revenue model, by contrast, where customers subscribe
and pay on an ongoing basis, you can expect your valuation to be a multiple of
Breedlove & Associates Sells for 6X Revenue
In 1992 Stephanie Breedlove started a payroll company to make it easier for
parents to pay their nannies on a recurring basis. It began small and Breedlove
self-funded her growth, which averaged 20% per year.
By 2012, Breedlove & Associates had hit $9 million in annual sales when
Breedlove accepted an offer from Care.com of $55 million for her business—
representing an astronomical multiple of more than six times Breedlove’s
Buyers pay up for companies with recurring revenue because they can clearly
see how your company will make money long after you hit the exit.
Not sure how to create recurring revenue? Here are four models to consider:
Products That Run Out
If you have a product that people run out of, consider offering it on subscription.
The retailing giant Target sells subscriptions to diapers for busy parents who
don’t have the time (or interest) in running to the store to re-stock on Pampers.
Dollar Shave Club, which was recently acquired by Unilever for five times
revenue, sells razor blades on subscription. The Honest Company sells dish
detergent and safe household cleaning products to environmentally conscious
consumers and more than 80% of their sales come from subscriptions.
If you’re a consultant and offer specialized advice, consider whether customers
might pay access to a premium membership website where you offer your
know-how to subscribers only. Today there are membership websites for people
who want to know about anything from Search Engine Marketing to running a
If you bill by the hour or the project, consider moving to a fixed monthly fee for
your service. That’s what the marketing agency GoBrandGo! has done to steady
cash flow and create a more predictable service business.
Ask yourself what your “one-off” customers buy after they buy what you sell. For
example, if you make a company a new website, chances are they are going to
need somewhere to host their site. While your initial website design may be a
one-off service, you could offer to host it for your customer on subscription. If
you offer interior design, chances are your customers are going to want to keep
their home looking like the day you presented your design, so they might be in
the market for a regular cleaning service.
If you offer something expensive that customers only need occasionally,
consider renting access to it for those who subscribe. ZipCar subscribers can
have access to a car when they need it without forking over the cash to buy a
hunk of steel. WeWork subscribers can have access to the company’s coworking
space without buying a building or committing to a long-term lease.
You don’t have to be a software company to create customers who pay you
automatically each month. There is simply no faster way to improve the value of
your business this year than to add some recurring revenue.