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Why Recurring Revenue Matters to Acquirers

March 1, 2021 | By Ryan Abbott

When John Warrillow sat down with Mike Malatesta, the founder of Advanced Waste Services (AWS), one key lesson stood out: the difference between recurring and reoccurring revenues.

Think of reoccurring revenue as repeat business. An example would be spending money at your local grocery store or favorite retailer. You provide them with repeat business – maybe once a week or every few months – but there is nothing in their control to stop you from going to a competitor.

In contrast, recurring revenue often includes moats or barriers that make switching more difficult for customers. Think of your mobile phone, which has a contract that you lock in for a couple of years. Or even your favorite streaming provider like Netflix or Spotify. By setting up automatic credit card payments and pesky cancellation processes, customers are less likely to leave. Malatesta understood the important difference between recurring and reoccurring revenue and used it to drive value in the eyes of acquirers when exiting AWS.

When approached by Covanta, AWS’s eventual acquirer, one of the first things they looked into was recurring revenue. They found that it accounted for 88% of AWS’s annual revenue – a goldmine.

The recurring predictability is what acquirers latch onto as it guarantees them annual revenue and cash flow. Mike focused on ensuring his reoccurring revenue was never more than roughly 11-13%, reducing his risk to acquirers. It was at a dinner with friends that the thought of exiting his company first crossed Mike’s mind. Once he made his decision however, his business was set up perfectly for a lucrative sale.

 

Recurring Revenue in any Business Model

You may be thinking, “How can I make recurring revenue with my current product or service? My industry doesn’t allow for a recurring revenue stream.” With some creative thinking, any business can integrate a highly attractive and profitable subscription-based model. Mike is proof that even in the unlikeliest of industries – like industrial waste collection – recurring revenue is possible If you’re interested in learning about the various subscription models, and what might work best for your company, read 9 Subscription Models Any Business Can Adopt