Boosting Your Business Value with Monthly Recurring Revenue
As a business owner, you know about Monthly Recurring Revenue (MRR). In the consumer world, that’s your razor blades, monthly cell phone fee, printer ink, etc. But how does MRR fit into the world of manufacturing, distribution, or B2B service businesses? What advantages can an MRR strategy offer, and how can a business expand into this model? This article will answer these questions, but first………
What Does MRR Do For Your Business Value?
Think of Monthly Recurring Revenue as the rocket fuel that will dramatically increase your business value. Let’s consider Software-as-a-Service (SaaS) companies. They often trade at multiples of revenue rather than earnings before interest, taxes, depreciation, and amortization (EBITDA). Even if the majority of your revenue is generated by your highly consistent customers, a steady, reliable flow of Monthly Recurring Revenue will pump up the value of your business. That’s because MRR makes future revenue much more predictable, requires less ongoing sales efforts and reinvestment, and delivers sticky customers – MRR customers are very sticky!
But What About My Business?
What if your company is not in the technology or software business? Can you implement an MRR model too? Absolutely! Take a look at these examples:
- Distributors/Manufacturers – Strategy: Develop proprietary products and sell them to OEMs. This will embed your components into their products and, once this is accomplished, it will be extremely difficult to change them. This is especially true for medical devices and other regulated industries.
- HVAC/Electrical/Other Trades – Strategy: Employ maintenance contracts that deliver monthly or quarterly services. This is a highly effective method of generating that valuable MRR.
- Staffing and Placement Companies – Strategy: Build a stable of temporary workers, charging them a monthly fee. This will prove to be far more valuable than project-based recruiting firms.
- Freight/Warehousing – Strategy: Employ MRR for inventory management and other services to convey a steady revenue stream and, therefore, a higher business value.
MRR Gives Your Business An Annual Head Start
Here’s MRR by the numbers: The company with little in the way of MRR starts each year at $0 and builds from there; 100% of the sales effort is aimed at bringing in new revenue. Compare that to the business that begins each year on a secure foundation of MRR business and only needs to employ a modest sales effort aimed at those clients. In our experience, these companies grow faster, with less sales effort, and, consequently, drive more profit margin, than companies lacking a recurring revenue component.
If you would like to know more about MRR and its game-changing possibilities, let us know. With our M&A experience, Touchstone Advisors can discuss how MRR can substantially increase the value of your business. Have you successfully dealt with a challenge to your business? We would very much like to hear your story, so please reach out to us.
Steven Pappas, M&A MI