If you have resolved to make your company more valuable, 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).
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.
Buyers pay a substantial premium for companies with recurring revenue because they can clearly see how your company will make money long after you exit.
Not sure how to create recurring revenue? Below are 5 models to consider:
Products That Run Out
If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells diaper subscriptions to busy parents who don’t have the time to run to the store for Pampers. Dollar Shave Club, which was acquired by Unilever in 2016 for five times revenue, sells razor blades on subscription (see WealthpreneurSpotlight below). The Honest Company sells safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions.
Membership Websites
If you’re a consultant who offers specialized advice, consider whether customers might pay to access a premium membership website where you offer your know-how to subscribers only. Today, you can find membership websites for people who want to know about everything from Search Engine Marketing to running a restaurant.
Services Contracts
If you bill by the hour or by the project, consider moving to a fixed monthly fee for your service. That’s how the marketing agency GoBrandGo! steadied cash flow and created a more predictable service business.
Piggyback Services
Ask yourself what your “one-off” customers need after they buy what you sell. For example, if you make a company a new website, chances are they are going to need someone to host their site. While your initial website design may be a one-off service, you could offer to host the website for your customer on a subscription basis. If you offer interior design, many of your customers may be looking for a regular cleaning service to keep their home looking good.
Rentals
If you offer something expensive that customers need occasionally, consider renting it to subscribers. ZipCar subscribers have access to cars when they need it without buying a vehicle. WeWork subscribers have access to the company’s co-working space without buying a building or committing to a long-term lease.
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 than to add some recurring revenue.
Wealthpreneur Spotlight
How Michael Dubin Sold Dollar Shave Club for $1 billion
In 2011, a man named Michael Dubin was fed up with the high cost and inconvenience of buying razor blades in stores. He had a vision of a subscription-based service that would deliver high-quality razor blades right to customers’ doors at an affordable price. In less than a year, Dollar Shave Club was born.
Dubin’s killer marketing campaigns and focus on customer service quickly earned the company a loyal following, transforming Dollar Shave Club into a cult brand.
However, the big players in the razor industry like Gillette were dominating the market and making it difficult for smaller companies to compete. That’s when global consumer goods company Unilever stepped in with a bold move.
In 2016, Unilever announced that it acquired Dollar Shave Club for a staggering $1 billion.
The acquisition was seen as a strategic move by Unilever to expand its presence in the men’s grooming market and to tap into a new generation of customers who were increasingly shopping online.
With Dollar Shave Club’s innovative marketing approach, Unilever could leverage the company’s loyal customer base and offer its own customers a more complete set of personal care products.
It was a match made in heaven: the unstoppable force of Unilever’s brand power and Dollar Shave Club’s cult-like following. And with that, the shaving market was changed forever.
The Truth about Business Valuation
- Roughly 80 – 90% of a business owner’s net worth is locked in their business.
- Business owners expect the monetized value of their business to fund anywhere from 70 – 80% of their retirement.
- Sadly, 98% of owners have no idea what their business is worth.
