Sell Your Business – The Number One Value Driver » Buying a business

Sell Your Business – The Number One Value Driver » Buying a business

When helping our clients sell their businesses, we get to witness buyer behavior first hand. The most important behavior is their economic vote – how much they are willing to pay for a business. Many factors go into their assessment of value, but a contractually recurring revenue stream is consistently the number one value driver.

Why is this so important? The first answer is risk. Buying a business is risky. Any factor that reduces this risk is rewarded with transaction value. Forecasted sales, for example are at the high end of the risk scale and are heavily discounted in value. Historical time and materials revenues that are ” most likely to be at about the same level” next year are somewhere in the middle of the risk scale and are valued accordingly.

The owner and key employees may leave after the acquisition and may take their customer relationships and accounts with them. Those customers locked into contracts are less likely to leave. The acquisition can temporarily inject uncertainty into the marketplace and cause disruption or delays in pending sales situations. The integration efforts will introduce execution risk into previously routine revenue generating activities.

The acquiring company wants the existing customers to stay put long enough to get comfortable with the new company. Contracts with plenty of time remaining are their security.

How can you use this knowledge to your advantage? Go on a mission to convert each time you enter and materials can be in a contract year. If you are a software company, for example, and you have customers who do not receive a 18% – 20% annual maintenance agreement, the customer implemented. A strategy could be a long "Get actual sale" in exchange for signing an annual contract maintenance. Service companies should review their T & M Records with their regular customers and develop programs that convert these annual programs at a fixed price.Equipment dealers come up with your own extended warranty programs. Services firms devise a concept where you provide departmental or functional outsourcing for your clients.

On a value scale, contractually recurring revenue is a 10, expected historical revenue is a 6 and a sales pipeline is a 3. Move your 3’s and 6’s to 10’s and recognize a big boost in your business selling price.