After releasing the first edition of my book Built to Sell , I got a number of great questions from readers about creating a sellable business. With the release of the second edition in Canada this week, I'm tackling a few of the best inquiries. Here's one:
Your book talks a lot about the importance of recurring revenue, but my product is a one-time-purchase item. Can I still create a sellable company?
Recurring revenue is important because, to create a valuable, sellable company, you need to demonstrate how the business will continue to thrive once you're gone.
Long-term contracts are the best way to guarantee a stream of revenue in the future, but you can also create recurring revenue through a subscription service or membership club, or even just by adding a line of consumables to what you sell.
First, brainstorm how you might evolve your one-time-purchase into a recurring revenue model. Consider the following questions:
Would customers pay a monthly or annual fee for the latest version of your product?
Is there an educational component of your product for which you could sell a monthly subscription?
Similar to the way printers need toner, is there a "consumable" that customers need to buy regularly to keep your product working well?
You might be surprised at the range of businesses that can be turned into a subscription model.
For example, Snowboard Addiction is a Whistler, B.C.–based business that creates and distributes freestyle snowboarding tutorials. Snowboarders download tips on how to pull off the latest moves on the hill.
When Nev Lapwood, Snowboard Addiction's founder, wanted to create a recurring revenue stream, he started to offer a subscription. Mr. Lapwood and his team create a new video every month or so; for one annual fee, customers can now download all new tutorials released in the year.
With a subscription model in place, his revenue is now more predictable, which is allowing him more time to travel (this month, Mr. Lapwood and his girlfriend are leaving for a five-month vacation to southeast Asia while his business continues to churn out subscription renewals).
If there are no opportunities to create recurring revenue, the next best thing is to demonstrate to an acquirer that you have a systematic and predictable way to get a customer.
For example, if you sell diamond engagement rings, document and track your process for getting a groom-to-be as a customer. If you have a predictable sales model, you may still have a valuable business, provided you can teach others to sell as predictably and systematically as you can.
Most acquirers would still prefer to buy a recurring revenue stream over a one-time-purchase with a predictable model for finding customers, so spend 90 per cent of your time thinking about how to create a tail to what you sell.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He is the author of Built To Sell: Creating a Business That Can Thrive Without You,