By: Joseph Vinar
Every business owner is asking, “What’s my company worth?” and “How do I increase its value?” As the adage goes, it’s worth whatever someone is willing to pay, so it’s helpful to view a company through the eyes of a potential buyer. Buyers pay for risk adjusted future cash flows. The two main ways to increase the value of your business are through increasing the future cash flows or by decreasing the risk associated with the cash flows.
Home services have traditionally received lower valuations due to riskiness of returns stemming from mostly one-time revenue. For example, a maintenance plumbing business does not know at the beginning of each month how many people will be calling with broken toilets and faucets. Perhaps a better plumber comes to town one month; suddenly a business that has been thriving for years could go under. The uncertainty of these revenues creates significant risks for investors.
Home services is strategically positioned to transition their operating models to generate recurring revenue. Recurring revenue is revenue coming from an ongoing contract or subscription. We’re seeing this with pest control companies which charge a monthly subscription fee for regular spraying. Plumbing companies are charging a fixed monthly rate for any plumbing issue to be rapidly resolved. These offerings provide peace of mind to the consumer and consistent cash flows to the business owner.
Transitioning revenue from one-time to recurring can significantly increase valuations. Even if an owner doesn’t want to sell their company for years, this shift towards recurring revenue meaningfully decreases risk and improves business fundamentals.