Create recurring revenue for your business

article originally posted in June 2015

By Scott Bushkie – CBI, M&A Advisor

Scott Bushkie - Cornerstone Business Services

When it comes to selling your business, not all revenue is valued equally. A business can have many types of revenue sources, ranging from one-time, large ticket sales to small, repeat transactions.

A company with a repeat customer base and recurring revenue stream represents much less risk than a company that has to start its sales process over from scratch for each project. The more predictable and less risky you can make your business, the more buyers will be willing to pay. 

When you think recurring revenue, you probably think of software packages. It’s becoming something of a rarity to purchase software off-the-shelf and use it for years and years. Instead, you pay a monthly subscription fee, assuring you access to the latest updates and service (and ensuring the vendor has a steady stream of income).

That same model can be applied to all sorts of businesses. For example, Kinnard Heating and Cooling, my HVAC contractor, offers an annual service model that includes seasonal tune-ups for my furnace and air conditioner. If something goes wrong, I’m first in line for service, I’ll get a discount on parts and labor, and I won’t have to pay any after-hours fees. 

That means that with just one sale, Kinnard gained two maintenance projects and plus fairly strong assurances that they’ll get my business should I need any emergency repairs. 

Meanwhile, Costco and Amazon have both developed similar ways to ensure they’ll get your business. Shopping at Costco requires a membership, of course, and customers feel compelled to make good use of that membership so they can get their money’s worth. 

Moreover, Costco will upsell you to an executive membership, which promises a two percent return on qualified purchases. That means customers are even more likely to look to Costco first for goods and services, in order to maximize that return. 

Amazon Prime also uses the membership model to capture customer loyalty, but instead of offering a rebate, they offer value-added services (such as free shipping and media content) for customers who pay the annual fee.  

I’ve also read about a local equipment manufacturer that added an optional data analytics package to their equipment. Now, for a fee, customers can access all sorts of utilization, quality control, and employee performance data for their machines. The analytics tool is a double win for the company, creating a recurring revenue stream and increasing its competitive advantage. 

For more ideas, I recommend The Automatic Customer by John Warrillow, the entrepreneur and business consultant who first wrote Built to Sell. In his new book, Warrillow outlines nine different ways to build recurring revenue. 

He focuses on a variety of subscription and membership models, such as weekly delivery contracts for florists, maintenance agreements for general contractors, and automatic shipment services for consumables like razors and socks. 

That said, there are other ways to generate recurring revenue. For example, we’re representing a fire protection business which recently shifted its sales focus from marquee projects to ongoing service accounts. Now the buyers can count on a certain amount of cash flow every month rather than depending solely on large ticket sales

We’re working on similar efforts here at Cornerstone Business Services. Our business is very project-based and built on reputation, and quite frankly it’s less valuable than a company that has a large, repeat customer base. That’s why we’re developing additional service models that would reach a different segment of business owners on a more repeat basis.

At the end of the day, it pays to look at your business in a different light and consider ways to create some kind of recurring revenue. The more you can get people coming back and repurchasing from you, the more you create value. 

Buyers will pay more for a company with a database of repeat customers. If you don’t already have that, it might be worth an exercise to see how you could approach your customers differently. 

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A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.