I recently wrote about how recurring revenue can make your business more predictable and less worrisome. Now I’d like to focus on how recurring revenue can make your business more valuable if you want to sell it.
An acquirer will need to be confident that your company will continue to generate revenue after you are gone. If you are going to create a recurring revenue stream, there are two numbers you need to start tracking:
1. Renewal rate
Arguably the most important metric on a recurring revenue model business is the rate at which your customers re-up each year. Whether you sell software as a service or run a wine club, track your renewal rate so you can accurately predict how many of your customers will stay with you from one year to the next.
2. Subscribers/members/contracts per salesperson
How many new customer contracts can one salesperson acquire in a given year?
The interplay between these two numbers will allow you to staff your sales team in the short term and demonstrate to an acquirer how quickly you can scale your model.
If you have 1,000 customers and a 90-per-cent renewal rate, you know you need to sell 100 new contracts to replace your departing customers. If the average salesperson can sell 50 contracts a year, you know you need to have two salespeople to keep your business on an even keel, three if you want to show a 5-per-cent growth rate and five if you want to grow at a rate of 15 per cent next year.
These numbers will also help potential acquirers predict the success of your business under their sales team. Let’s imagine an acquirer has a team of 100 salespeople nationwide who are going to dedicate themselves to selling your product. Assuming you’ve been tracking your contracts per salesperson for a while, acquirers can predict how many contracts a large sales force of 100 people could generate.
If they then combine the number of new contracts with your historical renewal rate, they will have a fairly good idea of how big your business could be under their wing — which is an equation any potential buyer will do before making an offer.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company.