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How $1 of Revenue Became Worth $7

Impact of recurring revenue on valuation
April 21, 2021 | By John Warrillow

Where sales are concerned, the past rarely predicts the future. A major competitor can enter the marketplace, and a once-hot product line can grow cold. The result? Your hockey stick-shaped growth trajectory can unexpectedly tail off — and with it, the long-term value of your business.

That’s why recurring revenue — the proportion of automatic, annuity-based revenue you collect each month — is a key driver of your company’s value.

PolicyMedical Moves to the Subscription Model

To illustrate how recurring revenue impacts the value of your business, let’s look at Saud Juman, the founder of PolicyMedical.

PolicyMedical built software enabling hospitals to store their policies and procedures. Customers paid for the software up front and were then billed a relatively nominal yearly fee for support and maintenance.

PolicyMedical had reached revenue of around $500,000 per year when Juman decided to buy out his original partner. They valued the business at one times annual revenue.

Juman then relaunched PolicyMedical, leveraging a SaaS (Software as a Service) licensing and delivery model; think cloud software. While the rebuild was long and difficult, as was the migration of hundreds of existing customers to a new software platform and billing model, the hard work paid off.

The quality, proportion, and predictability of PolicyMedical’s automatic, annuity-based revenue helped attract thirty-seven different offers from buyers.

In the end, Juman sold his company — once valued at 1 times annual revenue — for an eye-popping 7.2 times annual recurring revenue. In simple terms, a dollar of recurring revenue was worth seven times more than a dollar of “normal” revenue. (If you’re keeping score, that’s a 700% improvement.)

What can you learn from Juman? Increasing the proportion and quality of your business’s recurring revenue can yield a number of benefits: a smoother, less cyclical demand curve; automatic collection of cash and an increased lifetime customer value.

And a much higher valuation.

Start by Segmenting Your Customers

To transform your business to a recurring model, segment your customers based on the reason(s) they buy from you.

Next, analyze each segment and consider ways to meet their needs on a regular basis. Consider memberships, product subscriptions, maintenance programs, and ongoing training and support. Find ways to turn transactions into long-term, more predictable customer relationships.

Transitioning to a recurring revenue stream now will make your business more predictable in the near term and a whole lot more valuable over the long run.