Last week I met John Warrillow, author of the book Built to Sell, which has inspired many of my recent blog posts.
John was speaking at a corporate finance conference about the key messages in his book, and in particular the little-understood area of repeatable income.
As John explained, anyone looking to buy a business will value a company that has a regular, repeatable revenue stream higher than a company that only does one-off work.
Accountancy firms are a good example of businesses with repeatable revenue – e.g. the annual accounts preparation fee.
But there is a hierarchy of different levels of repeatability (with the most desirable first):
1. Long-term contracts – e.g. mobile phone contracts
2. Automatically renewing subscription-based supplies – e.g. insurances with companies such as Direct Line
3. Closed architecture* subscription-based supplies – e.g. software updates
4. Other subscription-based supplies – e.g. magazines
5. Closed architecture* supplies – e.g. razor blades
6. Consumables – e.g. toothpaste
*i.e. where you need to keep paying to benefit from a large initial up-front investment.
When K&H switched to using fixed price agreements a few years ago, we were (without realising it) moving ourselves up this hierarchy, probably from 6 to 4 (?). If you have a business with repeatable income, how can you change the way that you charge for your services so that you can rise up the hierarchy and as a result increase the value of your business? Can you think of any businesses that can’t do this?
Please post a comment or call/email me with your thoughts.