You thought the title should be “What type of Company do you want to Acquire? Maybe, but in truth you are essentially acquiring a revenue stream. The question is the relative stability and growth potential of revenue. And in my mind one type of revenue stream is clearly the more valuable. I refer to recurring revenue versus project driven non-recurring venue streams.
I have been employed or acquired companies with both of these characteristics. Typical recurring revenue stream companies include:
- Logistics companies such as Fedex and UPS
- Phone, utilily and water companies
- Manufacturing companies with targeted niches
- Call centers
- Internet based subscription service companies
- Software companies with annual licenses
Typical project or non-recurring revenue streams include:
- Engineering firms
- Contract manufacturing
- Construction firms
The recurring revenue model offers a high degree of revenue stability however revenues are generally harder to grow. On the other hand, project driven revenue is driven by one’s ability to win projects – with an emphasis on pricing and quality. Project driven revenue by its very nature results in revenue fluctuations from month to month and year to year. Nonethless, it offers more of an opportunity to garner large chucks of business in a shorter time horizon.
But what of the business buyer? Generally speaking its all about price. Hence companies with recurring revenue streams with a degree of growth are more valuable than non-recurring revenue streams that may be more volatile. Remember, as a buyer you must insure that borrowings – both principal and interest – can be paid down with some degree of comfort. That’s typically why private equity investors favor the comfort of recurring revenue streams.