One of the most popular and successful ways to add value to your business – and increase profit when selling – is recurring income streams. In our role as professional business exit consultants, we meet a lot of owners who believe they’ve taken their business as far as they can. Owners approach us when they think their business is ready for new ideas and new ownership and they’re ready to sell. And this is fantastic. Helping owners through the process of valuing, marketing and selling their business, matching them with a new owner is what we do best.
But where we really excel is supporting business owners in the years running up to exit. Preparing to exit can be a long process, often taking up to five years to build value and reach the point where your company is ready for the open market. Sometimes it’s the owners who think they’ve taken their business as far as they can, who are the ones that really need this preparation. When you’ve spent decades of your life building a business, you can develop blinkers and struggle to see the potential to add value.
In this article, we explain why recurring revenue or income is one of the best ways to add value to your business before you exit, and what this looks like in practice.
What is recurring income?
Recurring income is consistent revenue coming into your business on a regular basis. It is valuable because it’s predictable income that creates a stability that is attractive to potential buyers.
Why are recurring revenue models so attractive to buyers?
Recurring revenue streams are much more desirable to buyers than a glut of one-off purchases from one-time customers. While no recurring revenue stream is guaranteed to last forever, their existence signifies a more profitable business. And here’s why…
- Smooths out cashflow: predictable income helps to and guarantees a regular income to cover costs.
- Improves forecasting: instead of guessing customer demand, you can accurately forecast it.
- Security and stability: card payments or direct debits taken automatically mean no waiting for customers to pay invoices, or chasing late payments.
- Creates loyalty: loyal, repeat customers are highly valuable to buyers. When you have loyal members or subscribers, you don’t have to rely solely on marketing your products and services and constantly find new customers.
- Access to customer data: repeat customers are an engaged audience you can learn about and sell more to. Think of your local organic veg box. Every time you swap out an item, it helps the farmer understand customer likes and dislikes, so they can plan for next season’s crops.
- Creates growth: consistent income not only builds a healthy profit, it presents a buyer with a successful model that they can develop to bring in additional revenue.
All these factors mean buyers are willing to pay a premium for a business with recurring revenue streams.
What does a recurring income stream look like?
Long-term contracts
In a small business, recurring income can be as simple as signing up clients to retainers and long-term contracts. This creates guaranteed income, stability and security. As your business grows, the possibilities for recurring income grow too, especially in online retail and tech-based companies.
Subscriptions
Subscription models are a great idea and easy to set up if you already trade online. Think web hosting, tech support, magazine subscriptions, vitamin supplies, razors, flower bouquets, veg boxes and household cleaning products, to name a few! Even lawn treatment companies offer subscription models to take care of your green space without you having to think about it.
Amazon is perhaps the world’s biggest and most successful example of a subscription business model. They have an estimated 260 million subscribers across the globe, including 13-14 million in the UK. What started out as a free, next-day delivery subscription has expanded into TV and even groceries. They encourage repeat custom by tempting you with product subscriptions at a cheaper price and delivered automatically. Amazon has also capitalised on other subscription services to make their TV offer available to more people and grow their customer base effortlessly. The whole model is based on convenience and the illusion of making life easier for customers – for a fee.
Memberships
Memberships work well for specialist businesses with niche audiences. Football clubs have been offering memberships for years, signing up supporters to access exclusive content and services and profiting from their loyalty.
Most of us have at least one membership we’ve signed up to – usually gym or fitness related. Some of us forget we signed up to a free trial and continue paying without realising – absolute gold dust for ruthless businesses!
If your business can offer customers genuine added value through a membership offer, you can build trust, and create loyal, repeat customers and achieve recurring income.
Auto-renewals
Auto-renewal can be offered as an add-on to memberships and subscriptions. A classic example is insurance policies. It adds to the convenience for the customer as they don’t have to think about renewal, but it can catch people out if they aren’t aware that auto-renewal will happen.
If you’re thinking about offering auto-renewal, think carefully about how you communicate it and always give customers an opt-out.
What types of company suit recurring income?
You can create recurring income in any type of business. All you need is the seed of an idea, something you’re outstanding at, and a framework to implement it. We help clients in both areas: coming up with creative ideas and helping to get them off the ground.
Why do customers love memberships and subscriptions?
Recurring revenue models are successful because in the customers’ eyes they believe they’re getting a great deal. We all have busy lives and seek out convenience. Customers love that there are businesses out there to cater for their very specific needs.
Take flower bouquet deliveries. A luxury for most, but for those who can afford it, knowing a beautiful bouquet is going to land on your doorstep every month without having to think about which flowers to choose, and where or when to buy them, is a perfect match. One subscription helps simplify a long and complex to-do list.
Did you know there are at least nine types of recurring income your business could tap into?
Each of the nine types works best for a specific type of business and customer. To learn more about the models in detail, download our free guide: The Subscription Economy.
Revenue is the lifeblood of a business, and recurring income holds greater long-term value than multiple one-time sales. If you would like to start planning your exit and are considering recurring revenue as a way to build towards this, book a free, no-obligation call with an exit consultant.
