Why Buyers Value Recurring Revenue
Why do buyers care so much about recurring revenue—even when they are evaluating a company outside the software industry? The answer comes down to risk, predictability, and access to financing. In this video, M&A advisor Kirk Michie explains how recurring revenue and customer churn shape a buyer’s view of a business and the multiple that buyer may be willing to pay.
Why do buyers care about recurring revenue—even when the business is not a software company? The answer is risk. Contracted revenue can make future sales easier to predict, give buyers more confidence, and make an acquisition easier to finance.
What Is Recurring Revenue?
Recurring revenue is income a company expects to receive at regular intervals under an ongoing agreement or contract.
It may be measured as monthly recurring revenue, often called MRR, or annual recurring revenue, known as ARR. Although these terms are common in software, recurring revenue exists in many industries.
Examples may include:
Subscription fees
Service and maintenance contracts
Memberships
Retainer agreements
Long-term customer contracts
Repeat orders supported by an agreement
The more revenue a company has under contract, the more clearly a buyer can see what the business may earn in the months ahead.
Why Buyers Prefer Predictable Revenue
Buyers view predictable revenue as less risky.
If a company begins the year with a large share of its expected sales already under contract, the buyer has greater confidence in future cash flow. The business may not need to replace its full revenue base each year before it can begin to grow.
This predictability can also make the transaction easier to finance. Banks and investors may feel more comfortable supporting a purchase when the company has a stable base of contracted revenue.
Project-based businesses can still be large and profitable. However, a buyer may see more risk if the company depends on a few major projects or customers. When one project ends, there may be no guarantee that another will begin right away.
Why Churn Matters
Recurring revenue alone does not remove risk. Buyers also want to understand churn.
Churn measures the customers or recurring revenue a company loses during a given period. A business with a high churn rate must generate new sales simply to replace the revenue that disappeared.
For example, if a company loses 25% of its recurring revenue each year, its sales team must replace that 25% before the company can produce any net growth.
Buyers therefore look for a combination of:
A high percentage of recurring revenue
Low customer and revenue churn
Strong customer retention
Consistent growth
Limited customer concentration
A company with recurring revenue but high churn may appear less stable than its headline numbers suggest.
How Recurring Revenue Affects Business Value
Businesses with high recurring revenue, low churn, and steady growth may receive higher valuation multiples. These multiples may be based on revenue, EBITDA, or another financial measure.
The reason is straightforward: predictable earnings can make a company look easier to own, operate, and finance.
Founders preparing to sell should be ready to show how much revenue is recurring, how long customer agreements last, when contracts renew, and how retention has changed over time.
Candor Advisors helps founders understand how buyers may view their revenue, risk, and growth profile before going to market. To discuss your business, its potential value, or the timing of a sale, visit Candor Advisors and select “Talk to Kirk.”
