Renewable revenue is the holy grail for business owners looking to create a valuable — and sellable — company.
Whether your business is large or small, acquirers need to know it will keep going after you’re gone, so the best way to get an attractive cash offer is to give the acquirer visibility into the future revenue of your company.
In the first part of this series, I touched on open-architecture consumables such as toothpaste (No. 6 on the list) and closed-architecture consumables such as razor blades (No. 5). No. 4 was subscription revenue, enjoyed by publishers and analyst firms such as IDC.
Here are the top three recurring-revenue business models on my list:
No. 3: Renewable subscription, closed-architecture: the Bloomberg terminal
When customers make an investment to do business with you, they become very sticky. If they buy on a subscription model, you will have one of the most valuable businesses in your industry.
Traders and money managers swear by their Bloomberg terminal. Having sticky customers loyal to a proprietary platform allowed Michael Bloomberg to become, according to Forbes magazine, the world’s 23rd-richest person. Bloomberg combines a closed-architecture (you have to buy the terminal) with a subscription to the financial information the company publishes.
No. 2: Auto renewal subscriptions: document storage
When you store documents with Iron Mountain, you are charged a fee each month until you ask for your documents to be shredded or you agree to pick them up. Unlike a magazine subscription, for which you have to make the conscious decision to re-up, Iron Mountain just bills you until you tell it to stop.
Iron Mountain tracks its cancellation rate down to the decimal point and it can predict its revenue well into the future, which is why it enjoys such an attractive valuation.
No. 1: Contracts: wireless phones
The only thing more valuable than an automatic renewal subscription is a hard contract for a defined term. Rogers Wireless will push hard to get you on a multi-year contract for that new iPhone 4 when it becomes available in Canada because its stock price rises and falls based on revenue it can bank on into the future.
As you ascend the recurring-revenue hierarchy, expect the value of your business to go up in lockstep.
Special to The Globe and Mail
John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell . Throughout his career as an entrepreneur, Mr. Warrillow has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to The Corporate Executive Board in 2008. He is the author of Drilling for Gold and in 2008 was recognized by BtoB Magazine’s “Who’s Who” list as one of America’s most influential business-to-business marketers.