There are some simple things that you can do to get a better valuation of a business that you want to sell. The obvious is to increase Revenue and Profit. I want to talk more about subtler things that you can do to improve your valuation. In this post, I want to talk about the kind of revenue that you get and how it impacts your valuation.
To start with, I want to define three basic types of Revenue: One-Time, Repeat, and Recurring. One-Time Revenue is straightforward. This is transactional Revenue that does not repeat. Car Sales would be a classic example of this. Automobiles are not replaced often and so each sale is likely between a dealership and a person. My current car is 16 years old and so I hope that the dealer was not expecting Revenue from me over that time. There is sometimes brand loyalty between an individual and a car maker. In this case, a family might periodically buy from the same dealer for multiple family members. In my family, I had a cousin who owned a Plymouth dealership. My parents bought several cars and trucks from him over a 20-year period. This is Repeat business. Finally, as cars became more expensive, automakers started leasing cars to buyers. This allowed the customer to rent the vehicle over a long period of time with an option to purchase at the end of the agreement. This has created Recurring revenue for automakers. They get a payment every month from the lessee.
The value of these different types of Revenue is placed in exactly that order. One-Time is the least value. Repeat is more valuable than One-Time. Recurring is the most valuable. To understand why these different Revenue types are worth different amounts, let us look at each type. When you buy a company that has only One-Time Revenue, you must sell and market to close each individual deal. Repeat customers are pre-sold, but a change in ownership may cause them to re-think their purchase behavior. Recurring revenue is generally linked to contracts. This means that a percentage of the revenue is guaranteed for a period. If you were purchasing a company, would it be appealing to know that all the next 12 months of revenue was already sold?
At this point, most people object to me that they cannot create a different kind of revenue stream for their business. I point at the automakers and note that they have created a huge Recurring revenue stream from a business that was One-Time 30 years ago. Some creative ways of doing this must be used to help small businesses get through this process. A great place to start is loyalty cards. These are "points" programs that you might see at a Sandwich shop. You get the 10th one free. In the end, this is a 10% discount for repeat customers. This can be extended into Recurring Revenue for a Massage Therapist if they purchase a "Massage A Month" program that gets billed to the customer's credit card. Maintenance Agreements are other great ways to get Recurring revenue. This way customers pay you what is essentially insurance to defray larger incident costs.
There are many ways to move up the Revenue food chain. If you need to talk to someone about how to do it for your business, give me a call. Have a great day!
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