Recurring revenue is often considered attractive when it comes time to sell a business, and for good reason. If customers are already expected to keep paying next month or even next year, a buyer has a pretty clear idea of what revenue might look like after taking ownership.
But that doesn’t mean every business should try to turn individual purchases into monthly subscriptions or yearly contracts.
A neighborhood bakery, a commercial cleaning company, and a managed IT provider naturally make money in different ways. What works well for one might make little sense for another.
The better question isn’t simply whether recurring or transaction-based revenue is more valuable. It’s whether your revenue model fits how customers naturally buy from your business, produces healthy profits, and gives a future owner reasonable confidence that customers will keep coming back.
Quick Answer
Recurring revenue is often more attractive to buyers because it can make future revenue easier to predict, but it isn’t automatically more valuable than transaction-based revenue. The better model depends on the business.
Some companies naturally benefit from subscriptions, contracts, or ongoing service agreements. Others can build highly valuable businesses around individual purchases, projects, or repeat customers without forcing those relationships into a recurring model.
In This Article
- What’s the Difference Between Recurring and Transaction-Based Revenue?
- Why Is Recurring Revenue Attractive to Buyers?
- Can Transaction-Based Revenue Be Just as Valuable?
- When Does Recurring Revenue Make Sense?
- Can More Transaction-Based Revenue Make a Business Worse?
- What Revenue Model Makes Sense for Your Business?
- Build the Revenue Model That Fits Your Business
What’s the Difference Between Recurring and Transaction-Based Revenue?
Recurring revenue comes from customer payments that are expected to continue over time. Subscriptions, retainers, maintenance agreements, memberships, and ongoing service contracts are common examples.
Transaction-based revenue requires another purchase each time revenue is generated. A retailer selling a product, a contractor completing a project, or a repair company performing a one-time service would generally fall into this category.
Many businesses have some combination of both. The important question is what those different sources of revenue tell a buyer about the future.
Why Is Recurring Revenue Attractive to Buyers?
A buyer isn’t only interested in what your company earned last year. They also need to understand how much work it will take to generate that revenue again next year.
That’s the basic appeal of recurring revenue. Existing contracts or ongoing customer relationships can make future revenue easier to predict and give a buyer greater confidence about what the business might look like after ownership changes.
But calling revenue “recurring” doesn’t automatically make it dependable.
A subscription business that loses a large number of customers every year may need to continually find replacements just to maintain its current revenue. Contracts may expire soon or allow customers to cancel early. One large customer might account for a significant portion of the company’s sales.
The work still needs to be profitable, too. A customer paying every month isn’t especially valuable if servicing that account consumes most of the revenue it generates.
Buyers aren’t interested in the word “recurring” by itself. They want to understand why customers stay and what those relationships are actually worth to the business.
Can Transaction-Based Revenue Be Just as Valuable?
Consider a successful neighborhood bakery.
Most customers aren’t going to sign a contract promising to buy bread or pastries for the next three years. They stop in for breakfast on the way to work, order a birthday cake, pick up something for a holiday, or make another purchase when the need arises.
That doesn’t make the bakery’s revenue poor quality.
A buyer can look at years of consistent sales, repeat customers, predictable seasonal demand, healthy margins, and a strong local reputation and develop reasonable expectations about future business.
There may also be opportunities for more predictable revenue around the edges, such as regular wholesale orders or catering relationships. But the transaction-based core isn’t necessarily a problem that needs fixing.
Trying to force customers into a subscription simply because recurring revenue sounds more valuable could be a case of trying to solve a problem that doesn’t exist.
When Does Recurring Revenue Make Sense?
Now consider a commercial floor cleaning company.
A new customer might initially hire the company for a one-time deep clean. But the underlying need doesn’t disappear when the job is finished. The floors are going to need cleaning again eventually.
That creates a natural opportunity to turn a successful one-time job into an ongoing relationship through weekly or monthly service.
The company isn’t inventing a subscription just to create recurring revenue. The customer’s needs are already recurring.
That’s where owners should start. Rather than asking, “How can we create a subscription?” ask whether customers already have needs that keep bringing them back. If they do, there may be an opportunity to serve those needs in a more consistent and predictable way.
Can More Transaction-Based Revenue Make a Business Worse?
Revenue diversification sounds good in theory, but trying to add another source of revenue doesn’t automatically improve the business.
Consider a managed IT provider whose customers primarily pay monthly for ongoing support, maintenance, troubleshooting, and other services.
The company can certainly take on one-time installations and IT projects. Those projects may be profitable, and some may even introduce new customers who later sign ongoing service agreements.
But aggressively chasing one-time projects simply for the sake of adding another revenue stream can create new problems. Employees spend more time quoting jobs that may never close, revenue becomes harder to predict, and attention gets pulled away from the reliable monthly service business.
Their revenue may be more diversified, but the business isn’t necessarily better.
Revenue diversification and revenue improvement aren’t always the same thing.
What Revenue Model Makes Sense for Your Business?
Instead of starting with what buyers supposedly prefer, start with how your customers actually behave:
- Do their needs naturally repeat?
- How often do customers return?
- How predictable is demand?
- How profitable is the work?
- How much selling is required to replace completed projects or customers who leave?
- Would adding another type of revenue strengthen the business, or simply make it more complicated?
The goal is to understand what makes revenue dependable in your particular business and look for improvements that make sense for the customers you actually serve.
Build the Revenue Model That Fits Your Business
One useful way to examine your revenue is to ask:
“If I stopped selling tomorrow, how much of my current revenue would still arrive over the next 30, 90, or 365 days?”
Then ask another question:
“Does that answer make sense for the kind of business I operate?”
If almost none of a managed IT provider’s revenue would continue, that might expose a weakness in a business that naturally lends itself to ongoing service relationships.
For the neighborhood bakery, the same answer may be perfectly normal. The better questions are whether customers consistently return, demand remains healthy, and the business has good reasons to expect people to keep walking through the door.
The goal isn’t to make every dollar of revenue recurring or to diversify into as many revenue streams as possible. It’s to build a revenue model that fits how your customers buy, generates healthy profits, and gives you, and eventually a buyer, confidence that the business can continue performing in the future.
That’s not just valuable when it’s time to sell. It’s part of building a stronger business in the first place.
Our Strategic Sellability Plan can help you understand how a future buyer may view your revenue, customer relationships, operations, and other parts of your business, so you can focus on the improvements that actually make sense long before you’re ready to sell.
Give us a call at 800-395-7653 or contact us online to start the conversation.