How often do your customers come back to you? The answer can define the value of your business.
Such is the case at Wpromote, an online advertising agency that manages its clients’ online marketing and social-media promotions. Wpromote founder Michael Mothner is not looking to sell, but he did let my colleague Mark Tepper, the founder of Strategic Wealth Partners, and I have a look under the hood of his business to see just how sellable the company would be if Mothner ever wanted to get out.
We found a business that will have the big agency holding companies salivating if and when the time comes for Mothner to sell. Wpromote derives 99 percent of its $11 million in annual revenue from six-month contracts that renew at a rate of 96 percent.
“An acquirer could look at Wpromote’s business and project its performance many years into the future,” says Tepper. “Acquirers pay a premium for a business when they can see where the revenue will be coming from for years.”
A Business Model That Works
There are at least three ways to build a recurring revenue model into your business:
1. One-year re-up: This is a basic contract. The buyer has to make the proactive decision to repurchase from your company every year.
2. One-year auto-renewal: The buyer is committed for a period of one year but then has a window (usually 30 or 60 days) during which he or she can get out. If the buyer doesn’t cancel within the renewal window, they are committed for another year.
3. Greenfield: The customer is assumed to have renewed unless the customer states otherwise. Most cloud-based software applications, such as Wufoo forms, SurveyMonkey, and Constant Contact, use a Greenfield model.
How Strong Are Your Renewals?
Regardless of the model you choose, your renewal rate is the number that will drive the sellability of your company. Track your renewal rate on a rolling 12-month basis so you can spot trends early. How are you performing?
“Strive for an 80 percent-plus annual renewal rate,” says Tepper, “and you’ll have a line of buyers ready to buy your company when you’re ready to sell it.”