To John Warrillow, the founder of the Sellability Score and author of the book Built to Sell, there are few things more important than recurring revenue for a business owner who is prepping to sell a company. Recurring revenue is predictable revenue that can be expected to continue in the future.
To a potential acquirer, though, not all recurring revenue streams are created equal, and some types are far more valuable than others. Warrillow ranked the six different types of recurring revenue from most to least valuable.
1. Hard contracts. What's the holy grail of recurring revenue? Look no further than your cell phone contract. "When the iPhone launched in the United States, AT&T insisted that you buy a three-year contract. Why? Because the stock value of AT&T mobile went up and down based on that contract revenue," Warrillow says.
2. Auto renewal subscriptions. Even better than these two subscription models are the kinds of subscriptions that go on forever, or at least until a customer tells it to stop. In the world of recurring revenue this is known as an "evergreen." Document storage subscriptions are good examples of evergreens.
3. Sunk money subscriptions. A sunk money subscription requires the initial purchase of a platform. A good example of this is the Bloomberg Terminal--a proprietary platform you have to buy in order to subscribe to Bloomberg's financial publications, which has made Michael Bloomberg a very rich man.
4. Straight-up subscriptions. These are finite subscriptions, like for magazines, that offer an optional re-up period at the end of the contract.
5. Sunk money consumables. This is when a customer makes an initial investment in a platform. For example, what if instead of going to Starbucks, you prefer to make your own coffee at home, and purchase a $500 titanium luxury coffee maker to prepare hundreds of perfect cups over the long haul. Now you need to buy the accessories to make it work. This means that as a consumer, you've bought a platform rather than just a product. In the world of recurring revenue, platforms trump products every day of the week.
6. Simple consumables. Are you jonesing for a grande, three-pump cinnamon dolce, soy, no whip, no foam latte? Or maybe just a drip coffee? Either way, if you're a loyal Starbucks customer you're coming back for more of the company's products.
If you're a business owner, establishing reoccurring revenue isn't only good for business, it ensures you'll get the maximum value when it comes time to sell.