If you have a transaction business model where customers pay once for what

they buy and do not return, expect your company’s value to be a low single-digit multiple of your

Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).

If you have a recurring revenue model, by contrast, where customers subscribe

and pay on an ongoing basis, you can expect your valuation to be a multiple of

your revenue.

Breedlove & Associates Sells for 6X Revenue

In 1992 Stephanie Breedlove started a payroll company to make it easier for

parents to pay their nannies on a recurring basis. It began small and Breedlove

self-funded her growth, which averaged 20% per year.

By 2012, Breedlove & Associates had hit $9 million in annual sales when

Breedlove accepted an offer from Care.com of $55 million for her business—

representing an astronomical multiple of more than six times Breedlove’s

revenue.

Buyers pay up for companies with recurring revenue because they can clearly

see how your company will make money long after you hit the exit.

Not sure how to create recurring revenue? Here are four 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 subscriptions to diapers for busy parents who

don’t have the time (or interest) in running to the store to re-stock on Pampers.

Dollar Shave Club, which was recently acquired by Unilever for five times

revenue, sells razor blades on subscription. The Honest Company sells dish

detergent and 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 and offer specialized advice, consider whether customers

might pay access to a premium membership website where you offer your

know-how to subscribers only. Today there are membership websites for people

who want to know about anything from Search Engine Marketing to running a

restaurant.

Services Contracts

If you bill by the hour or the project, consider moving to a fixed monthly fee for

your service. That’s what the marketing agency GoBrandGo! has done to steady

cash flow and create a more predictable service business.

Piggyback Services

Ask yourself what your “one-off” customers buy after they buy what you sell. For

example, if you make a company a new website, chances are they are going to

need somewhere to host their site. While your initial website design may be a

one-off service, you could offer to host it for your customer on subscription. If

you offer interior design, chances are your customers are going to want to keep

their home looking like the day you presented your design, so they might be in

the market for a regular cleaning service.

Rentals

If you offer something expensive that customers only need occasionally,

consider renting access to it for those who subscribe. ZipCar subscribers can

have access to a car when they need it without forking over the cash to buy a

hunk of steel. WeWork subscribers can have access to the company’s coworking

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 this year than to add some recurring revenue.