The Importance of Recurring Income Streams
By Nina Kaufman, Esq.
“You see this here doughnut? What you got is the hole.”
I’ll never forget that sinking feeling when I heard that from a business expert I consulted. I couldn’t believe it. I was stunned. Humiliated. 12 years of building my law firm—all that blood, sweat, and treasure—and I have nothing to show for it … ? Sad, but true. Because of my ignorance, when my business partnership imploded, I had no choice but to close my doors and start again.
One of the reasons our firm had no “enterprise value” was it lacked recurring revenue. As I’ve since learned, potential buyers don’t pay for the success your company’s past success. They buy its potential to earn money in the future. And few things better indicate future success than a predictable, recurring income stream.
Can your business model support any of these common recurring income streams?
- Long-term sales contracts. Locking customers into long-term sales contracts create guaranteed future income. A common (painful) example is the two-year contract your cell phone carrier makes you sign. By offering a discount on the cost of the cell phone, they get your ongoing business – or, if you cancel the contract, they get a hefty cancellation fee.
- Subscription-based products and services. Instead of a one-time fee for a one-time service, your company offers better pricing in return for subscribing to the service. Examples: magazine subscriptions, or website access subscriptions.
- Maintenance contracts. This is another services-based recurring revenue model. Maintenance contracts ensure the products and services purchased by your customer continue to perform as expected – and that you continue to receive income.
- Product training fees. If your product can be complicated to use, has frequent new releases, or if the customer has significant employee turnover, a long-term contract to provide training services gives them peace of mind and you a recurring income stream.
Tip: Recurring revenue streams provide a basis for demanding top dollar when time comes to sell your business. Just be careful not to lose focus on your core value proposition.
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