Will FY24 be the year you seriously drive up the value of your company?

Approaching the end of FY23, the time to review and make new budgets for FY24 is rapidly approaching for Australian businesses.

If you have resolved to make your company more valuable in the upcoming year, you may want to think hard about how your customers pay.

If you have a transaction business model where customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).

However, if you have a recurring revenue model, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue.

Let's look at the following impressive case: Breedlove & Associates Sells for 6X Revenue

A few decades ago, in 1992, Stephanie Breedlove started a payroll company to make it easier for parents to pay their nannies on a recurring basis. It began small and Breedlove self-funded her growth, which was very decent and averaged 20% per year. By 2012, Breedlove & Associates had hit $9 million in annual sales when Breedlove accepted an offer from Care.com of $55 million for her business—representing an astronomical multiple of more than six times Breedlove’s revenue.

Buyers pay up for companies with recurring revenue because they can clearly see how your company will make money long after you hit the exit.

So how can you achieve a recurring revenue stream?

Below are five models to consider:

1. Products That Run Out

If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest) in running to the store to re-stock on Pampers. Dollar Shave Club, which was acquired a few years ago by Unilever for five times revenue, sells razor blades on subscription. The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions. 

2. Membership Websites

If you’re a consultant and offer specialized advice, consider whether customers might pay access to a premium membership website where you offer your know-how to subscribers only. Today there are membership websites for people who want to know about anything from Search Engine Marketing to running a restaurant.

3. Services Contracts

If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business. Or if you are an importer and sell products to retailers, offer a service contract where products can be personalized. The Tripp Trapp (r) high chair from Stokke can be engraved with the baby's name at selected retailers.

4. Piggyback Services

Ask yourself what your “one-off” customers buy after they buy what you sell. For example, if you make a company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service.

5. Rentals

If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. WeWork subscribers can have access to the company’s co-working space without buying a building or committing to a long-term lease; they have successfully grown into a global workplace provider.

You don’t have to be a software company to create customers who pay you automatically each month. There is simply no faster way to improve the value of your business this year than to add some recurring revenue.

If you want to get a grip on the Value of Your Business in a timely preparation for your upcoming FY24 value driving business, please check out our upcoming Get a Grip Owners Roundtable Series (7 weeks). 

https://www.business-exit-breakthroughs.com.au/get-a-grip-on-the-value-of-your-business