Three Keys in a Recurring Revenue Business

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Recurring RevenueRecurring revenue businesses, particularly those built around subscriptions, are becoming more and more popular in the internet era. Even better for those interested in selling, they often fetch a higher multiple than businesses that do not have subscription/recurring revenues. There are three numbers that anyone building such a business should spend a lot of time refining and correlating, and if they do those tasks well, they will quickly have a business they can sell.

1. Gross Margin per Customer

This is pretty straightforward. Given your costs to service a client with either a product or a service, what margin do you make? This doesn’t have to be an impressive number if your volume is high, and conversely, if you’ve got great margins, you don’t necessarily need overwhelming volume. This is a number that every business owner should know.

2. Lifetime Value (LTV)

Another number that every business owner should know is the lifetime value of the average customer. If they are selling products, this number can be sampled over a period of time if it’s not clear that a customer ever stops buying from you forever. If you are selling a service, you would look at the revenue gained before the customer cancelled the service and average that out against all of your customers.

3. Customer Acquisition Cost

Customer Acquisition Cost becomes a really important part of this trilogy of keys, because it tells you whether your business model is viable in the short and long term.

If your customer acquisition cost is paid for either within the gross margin or over lifetime value, you’re in the black. But if, for example, your customer acquisition cost is $100, your lifetime customer value is $100, and you have a margin of 20%, you’re losing money every single time you get a new customer.

Customer acquisition usually isn’t just one single cost, but is a combination of all your marketing efforts across all your channels, as well as the salaries of your team that drive those channels.

As soon as you have proven your model in such a business, you are actually in a prime position to sell.

Unless you want to push forward with new growth or sit back and take it easy for a while (both options that would keep you in the driver’s seat and not selling) you should seriously consider selling a proven recurring revenue business. The newer a business is, the more opportunity there is for growth and new market share, which is very attractive to an incoming buyer.

Whether you have a recurring revenue business you’d like to sell or you’d like to buy one, we can help! Give us a call.

Use the Net Promoter Score to Increase the Value of Your Business

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Ten out of TenWe’ve seen the question posed so often after completing a transaction that we know the words by heart: “How likely is it that you would recommend this company to a friend or colleague?”  Unless you had a strongly positive or strongly negative experience, you’ll usually just click past this online or walk past the various happy to sad faces waiting for your judgment at airport security or in bathrooms.

Everywhere, it seems, there’s an opportunity for us to give feedback. But why does this matter for selling a business? Because you’ll be able to give a seller real data, not projections.

Origin of the Question

This question has its origin in Fred Reichheld and his book The Ultimate Question.

Fred is a loyalty expert who found the answer to this question of recommendation provided important insights on the customer experience and ultimately, loyalty. The number, which Reichheld eventually called “Net Promoter Score,” often accurately predicts how often a customer will purchase and repurchase from you and refer other clients to you.

A score of 9 or 10 means that customer is a promoter.

They love what you do and tell others about it. Now, just because someone is a 9 or a 10 doesn’t mean that they will take the time to answer in an online survey. That’s why you have to ask the question in multiple channels until you obtain an answer that can go into your CRM and/or database. When you do, you no longer have projections but hard data.

A score of 7 or 8 means a customer is “passively satisfied” or neutral.

While you might think a 7 or 8 out of 10 isn’t bad (and in other circumstances, it might be not so bad) in the Net Promoter Universe, this is a person who can either take or leave your services. It doesn’t mean that every 7 or 8 can be moved to 9 or 10, but if you aren’t even asking the question, you don’t even have the opportunity to move them up.

A score of 6 and below means that the customer is a detractor of yours.

Worse that the “passive satisfaction” of a 7 or 8, this customer tells others that he/she wasn’t happy with your work and attempts to steer others away from you.

Questions like the one at the heart of Net Promoter Score are treasures in that they give you an opportunity to have a deeper conversation with your customers. Those who are neutral or detractors are actually giving you opportunities to learn. Because you’re asking them indirectly about their experience — not “how was your experience” but rather “would you recommend us” — you are giving them permission to share what they think can be improved.

This essentially free information (free because how much does it cost you to ask a single question of a customer who has already bought from you?) can lead to great changes in your business and possibly an increase in the 9s and 10s in your customer base.

Not only has your business become more valuable with this information in the short and medium term, but in the long term a buyer can see that you’ve been actively soliciting customers for feedback and have built a culture that isn’t afraid to ask customers directly how to improve.

“Call Me When You Have a Buyer”

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Call Me When You Have a BuyerAs part of our job as business brokers, we cultivate long-term relationships with buyers and sellers. We do so with the latter because sometimes we plant the seed of possibly selling a company years and years before it may happen. With the former, it’s a question of earning trust by consistently bringing solid opportunities.

Sometimes on these calls or emails, we will get into a conversation with a seller who has tried to be his own broker in the past. And as such has (predictably) had bad experiences with looky-loos and tire kickers. “I’m only interested in serious buyers,” the seller will grimly state. “Call or email me when you get one.”

If only it were that easy.

The reality is that buyers are reasonably savvy about the acquisition process. They are going to want a fair amount of information about the business upfront. Furthermore, we as brokers want to exclude tire kickers from bothering our clients, so we ensure that they have the financial ability to close a transaction of the size they pursue. We aren’t interested in finding one serious buyer, but rather half a dozen or more.

Confidential Business Review

The process begins with a Confidential Business Review (CBR) that details business operations and historical financial information. This briefing allows buyers to quickly see whether a particular business suits their needs and if their transaction goals are in line with what the seller is offering.  

Once a very simplified form of the CBR (brief description of the business, approximate revenues, net owner benefit, and asking price) has circulated among our internal buyers and the confidential marketing channels we use, we will get a number of interested parties who submit Non-Disclosure Agreements along with proof of financial fitness. For the sake of argument, let’s say that a given broker may reach out to 500 and get 50-75 interested parties for this first step.

NDA and Balance Sheets

Once we get their NDAs and balance sheets, we will then get them the CBR. From that step perhaps a dozen of the original 50-75 decide they want to go further and have a phone or in-person conversation with the seller. Of the dozen, perhaps half decide to visit the business in person and of those, perhaps three make bonafide offers.  

See the difference? At each step of the way, we have continued to qualify the buyer both in terms of financial ability and knowledge of the business. And at the end, instead of “one buyer” we may have several, and these people have come to this step with serious knowledge about the business opportunity.  

Save yourself from the tire kickers and leave the work (only a fraction of which is detailed above) to us. That leaves you free to run your business and keep it growing and profitable until you’re ready to pass it on to the buyer whose offer you ultimately accept — after a screening process that ensures it’ll be a serious offer.

Common Characteristics of Businesses That Sell Quickly

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Moving QuicklyWhile every business sells for different reasons, the businesses that sell quickly here in our offices — and by quickly we mean within 24-72 hours — all have a few traits in common. These traits happen to work well in the case of selling a business, but they are always present at the heart of the most successful businesses. By keeping an eye on these fundamentals, business owners are actually ensuring that should they want to sell, they will get several full price offers, and in a very short time horizon as well.

Clean Books and Taxes

You’ve heard us discuss this in past articles: have clean books, or face the possibility of not being able to sell. But successful business owners aren’t interested in having clean books just in case they want to sell. They know that current financial statements are essentially an up-to-the-minute health snapshot of their business. By regularly perusing clean and current financials they are able to see trends and make adjustments or trim spending in underperforming divisions. Clean books and current tax payments are simply by-products of a successful business. They also happen to be essential to a business sale and are an immediate shine on any new business listing.

Stable and Up-trending Revenues

Successful business owners look at financial statements to see if they are growing revenues and profits month-to-month and year-to-year. This helps them properly forecast and hire. Buyers love to see the same. An off year with context will be explainable: we had a lot of businesses that sold in past years that either had slow growth, flat-lined, or even contracted a bit in the 2008-2010 time period because of the financial crisis. But because buyers saw stability in the numbers before and after that time period of crisis they were confident that they too could weather a storm if it came.

Consistent Cash Flow

Savvy business owners aim for consistent cash flows. This doesn’t mean that there’s no seasonality in the business, but that the seasonality is clearly pinpointed and planned for. This makes financing easier, should it be required. Again, as with clean books and taxes, consistent cash flows are the by-product of a successful business, not something that someone has to quickly put together in order to sell one.

Delegations

If business owners haven’t read books like Built to Sell or The E-Myth they have usually built their businesses around the concepts discussed in those books just by doing their homework.

  • Have systems in place so that the business can run without you
  • Have clear job descriptions for all the key members of your team and have solid people in those positions
  • Make sure it’s clear whether a potential buyer is buying a job or buying a business.

Reasonable Price

A business is only worth what someone will pay for it, but more importantly, a business is, outside of a strategic acquisition, only worth around what a professional valuation rates it. An owner who builds a company to sell may have a number in his/her mind, and that’s certainly a point around which to build a conversation, but unless the business provides evidence to get to that number, such a number is a fantasy.  

Remember that only 20% of businesses are ever successfully sold. Here at Apex, we have a much better track record, and part of that success is getting to the right price for both buyers and sellers. Successful business owners have been setting prices for their clients for years and letting the market, not their ego, tell them what products/services are worth. The sale of the business is only the last decision in a number of previous sensible pricing decisions.

If you only have three of these characteristics in your business, we should have a conversation about what you’d like to do in the future. If you have all five, you should be having a conversation with us about why and when you should sell.