To predict how much of your revenue will reoccur year over year–and how much new business you’ll have to drum up–there are two numbers you need to track. Here they are.
RecentlyI wrote about how recurring revenue can make your business more predictable and less worrisome by helping you see your revenue stream well into the future. I'd now like to focus on how recurring revenue can make your business more valuable if you ever want to sell it.
An acquirer will need to be confident that your company will continue to generate revenue after you are gone. In short, you have to help them see the future by demonstrating how your revenue will be reoccurring.
If you are going to create a recurring revenue stream, there are two numbers you need to start tracking long before you're ready to leave:
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, document storage 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.
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 revenue model.
For example, if you have 1,000 customers and a 90 percent renewal rate, you know you need to sell 100 new contracts to replace your leaving customers. If the average salesperson can sell 50 contracts per year, you know you need to have two salespeople to keep your business on an even keel, three pitchmen or women if you want to show a 5 percent growth rate and five salespeople if you want to grow at a rate of 15 percent 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 to acquire your business.