Is Your Business Valuation at Risk without Recurring Revenue?

Seldom is a business worth what we think.

It’s the hard truth that most VAR, ITSP, and MSP leaders fail to acknowledge, and ultimately underestimate, the disruption being caused by the increasing preference to consume all things IT on a monthly basis. Yet customers are looking to these leaders for managed services, digital transformational services (IoT), the cloud. For the remainder of this piece I’ll refer to this as monthly recurring revenue or the subscription-based economy.

The short-term effect rears its ugly head as softness in their business, and a shift in business to recurring revenue friendly businesses.

The longer-term effect manifests itself in the precipitous drop in their businesses enterprise value and what the business is ultimately worth at the time of exit.

For many, the exit determines the financial freedom the owner enjoys in retirement. Most entrepreneurs and senior leaders have a great deal of their net worth tied up in their businesses.

Countless conversations of late reveal a frightful trend of owners not confronting the ultimate reality—that the subscription-based economy is undermining their company’s worth. And, if they don’t add a viable, vibrant and scalable monthly recurring revenue component, their exit in 12, 24, or 36 months will be hollow, much like the center of a zero.

I believe my opinion has some worth, but more importantly the likes of Joe Panettieri (@JoePanettieri) at ChannelE2E, and Paul Dippell (@pdippell) of Service Leadership have done some solid work on this subject. And the numbers don’t lie.

Exiting from one’s business today will be underwhelming if you don’t have a significant monthly recurring revenue stream or true intellectual property. For example, if you have $30M in revenue, your business mix might look something like this:

  • Product = 64%
  • Professional and Onsite Services = 21%
  • Support Services = 10% (you have a PSA & RMM Tool, but only annual upfront contracts)
  • Other = 5%

The rough, non-scientific, and back of the napkin approach to a simple valuation—leveraging some of the information provided in ChannelE2E’s Podcast—would be somewhere in the ballpark of $3.2M – $5M.

Fast forward three years, and assuming no dramatic changes in business mix and no orchestrated effort to add a significant subscription-based revenue stream, that same business would be worth only $981K – 1.64M. It’s a melting ice cube.

To reiterate, the quick and dirty estimates above are not intended to peg the business’ exact worth—there are many variables that move the needle north or south.

Rather, the goal is to paint a reasonable picture that shows the magnitude of the disruption that is occurring as the market chooses to consume IT services on a monthly basis. It’s a shift that’s occurring whether you’re ready or not, and the numbers being posted are just too compelling to think otherwise.

So, if you’re thinking you can avoid the inevitable, you can’t. This is all actually happening, and based on numerous conversations I had at Cisco’s Worldwide Partner Summit, it’s happening at a pace and volume that has caught Partners off-guard. Many admitted they are scrambling to deal with the threat posed by both new and legacy competitors who are already on the recurring revenue dance floor.

It’s time to iterate and add a truly scalable, significant, and profitable monthly recurring revenue component to your business mix. But understand, this is a 12-18 month journey for most organizations, and requires the same focus and rigor that building your current business did when you launched it.

The next move is yours, your financial freedom depends on it…

Remain Calm and Cloud On…

About the author

George Mellor

George Mellor is the Founder & CEO of KloudReadiness, LLC. Prior to founding KloudReadiness, George co-founded VARcompliance (acquired by Netformx). George has spent his adult life working within the value added reseller and solution provider marketplace driving innovative approaches that positively affected the growth and profitability of several businesses. He’s held senior leadership roles at several solution providers including CBE Technologies, Netivity Solutions (now NWN Corporation) and Charter Systems.

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