Recurring revenue increases business valuation

When a business is acquired, buyers are primarily purchasing its future stream of profits. Recurring revenue, generated from subscriptions or long-term contracts, is a much more reliable indicator of future profits than one-time sales.

Acquirers value recurring revenue streams more highly for several key reasons:

• Predictability: Subscription-based income is predictable and stable, reducing the risk for the buyer. It provides a clear forecast of future cash flow.
• Stickiness: Customers who are subscribed to a service are more likely to continue using it, creating a "sticky" customer base with a lower churn rate.
• Reduced Sales & Marketing Costs: Acquiring new customers is expensive. A business with a strong recurring revenue model has a built-in customer base, reducing the ongoing costs of sales and marketing.

For example, in the home security industry, a dollar of recurring monitoring revenue is valued significantly higher (e.g., nearly 3x more) than a dollar of one-time installation revenue. This is because the monitoring revenue is expected to continue long into the future, while the installation revenue is a one-off transaction.

This valuation premium applies across many industries, from software (SaaS) to service contracts. A business with a higher proportion of recurring revenue is not only less stressful to run but is also fundamentally more valuable in the eyes of a potential buyer. It moves a business away from the stressful "sell-do" cycle and toward a more sustainable and scalable model.