“You see this here doughnut? What you got is the hole.”
I’ll never forget that sinking feeling when a business valuation expert told me that about my company. I couldn’t believe it. I was stunned. Humiliated. 12 years of building my law firm—all that blood, sweat, and treasure—and I have nothing to show for it … ?
Sad, but true. Because of my ignorance, when my business partnership imploded, I had no choice but to close my doors and start again.
I hadn’t built a business. I had built a job. Our income stream flowed like … a rollercoaster. Up and down. Peaks and valleys. And with all of the similar exhilaration and anxiety. We didn’t have predictable repeat revenue to count on.
That’s one of the reasons our firm had no “enterprise value.” And why I had a hole in a doughnut.
Here’s a tip: The value of your company isn’t just based on past success. That’s not what buyers or investors look for. They buy its potential to earn money in the future. Few things better indicate future success than predictable, repeat revenue streams.
So whether you might want to cash out BIG in the future, or just turn your business into more of a cash cow, look at whether your business model could support any of these common recurring income streams:
- Long-term sales contracts. Locking customers into long-term sales contracts create guaranteed future income. A common (painful) example is the two-year contract your cell phone carrier makes you sign. By offering a discount on the cost of the cell phone, they get your ongoing business – or, if you cancel the contract, they get a hefty cancellation fee.
- Subscription-based products and services. Instead of a one-time fee for a one-time service, your company offers better pricing in return for subscribing the service. Examples: magazine subscriptions, content access, Harry’s razor blades.
- Maintenance contracts. Maintenance contracts ensure the products and services purchased by your customer continue to perform as expected. Examples: IT services, SEO services, bookkeeping services.
- Product training fees. These can arise if your product is complicated to use, has frequent new releases, or if the customer has significant employee turnover. A long-term contract for training services provides both you and your customers peace of mind (for different reasons!).
Recurring revenue streams provide a basis for demanding top dollar when time comes to sell your business. And, they give you breathing room for the here-and-now. Just be sure to price them profitably for maximum leverage.