The single biggest thing you can do to increase the value of your business — no matter the size — is to create a recurring stream of revenue that an acquirer can count on into the future.
Although all recurring revenue will have a positive impact on your company's value, some forms are more desirable than others. Starting today and continuing tomorrow, I'll present six forms of recurring revenue from least to most valuable:
No. 6: Regular, open-architecture consumables: toothpaste
This morning I woke up and brushed my teeth with Crest Whitening Gel. I'm fairly sure the "whitening gel" is a placebo, but it works for me given the amount of black coffee and red wine I consume. Every once in a while I'll go off-piste and try a Colgate product that promises "extra whitening," but eventually I work my way back to Crest.
If you sell a consumable, start tracking your repurchase rate from existing customers. This will be a number that acquirers will use to calculate your projected sales into the future — and to calculate how much they're willing to pay to buy your company today.
No. 5: Regular, closed-architecture consumables: razor blades
More valuable than open-architecture consumables such as toothpaste are closed-architecture consumables. In these cases, the customer has made an investment in your platform.
When I started using Gillette Sensor razor blades, I first had to buy a handle. Now I buy a new five-pack of blades every month and I can't bring myself to try Schick because it has a different handle mechanism. I have been a Sensor guy since I grew my first patch of peach fuzz. I've made an investment in the platform, and that makes me reluctant to switch providers.
At the office, I use a Xerox printer. Xerox practically gave me the printer to get me hooked on having to buy its toner cartridges.
Expect to garner a premium for your business if you can demonstrate a loyal group of customers who have made an investment in your product.
No. 4: Renewable subscriptions: magazines
One better than having loyal customers who repurchase is having revenue that is guaranteed into the future. For example, I am a loyal subscriber to Outside magazine. Each year I get a re-up letter, and I send a cheque to cover my next 12 issues. Outside recognizes 1/12 of my subscription fee the month it receives the cheque and for each of the next 11 months.
Magazines are cheap compared with the subscriptions that analyst firms such as Frost & Sullivan or IDC sell their customers, which can run into the hundreds of thousands of dollars, making them more valuable companies than their competitors that offer project-based consulting.
JUNE 16: The top three recurring-revenue business models.
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.