The revenue model that separates stressful businesses from stable ones

Happy Thursday!

Today I want to cover another key piece I look for when evaluating any business:

Whether the business generates recurring revenue.

This one characteristic does more to determine your day-to-day experience as a business owner than almost anything else.

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What recurring revenue actually means

For my purposes, recurring revenue means the business has customers who come back and pay again, at minimum, a couple of times per year. (Though ideally, much more frequently than that).

This can look like a lot of different things:

• Service contracts that renew automatically

• Maintenance agreements that bring the same customers back on a monthly or quarterly schedule

• Subscription-based software

• Consumable products that customers reorder regularly

…the common thread being that the revenue doesn’t start from zero every month.

The problem with project-based income

The opposite of recurring revenue is project-based revenue: businesses where each job is essentially a one-time transaction.

These businesses aren’t necessarily unprofitable.

Some of them generate significant revenue per job!

But the structural challenge is that the revenue has to be rebuilt constantly.

Every week you’re starting over, finding new customers to replace the ones you just finished serving.

That creates a very different operational reality.

Instead of managing and growing an existing customer base, you’re perpetually focused on acquisition.

The pipeline always needs to be full, and if it dries up for any reason, the business feels it immediately.

(Inside Acquisition Ace, members learn how to evaluate revenue models before making an offer, so they’re not discovering structural problems after they close. To see how Acquisition Ace can help you secure your first business deal, book a call with our team here.)

Why multiples reflect this

Here’s something worth understanding: the market already prices this in.

Businesses with strong recurring revenue typically command higher multiples than comparable project-based businesses.

When you see a business selling at a low multiple, it’s often because the revenue isn’t recurring.

Low price and project-based income frequently go together.

And while that can look attractive on the surface, the multiple is usually telling you something important about the business’s fundamental structure.

One practical way to think about this

If you’re evaluating a business that’s primarily project-based, the question worth asking is: is there a natural path to converting this into recurring revenue?

In a lot of service businesses there is.

A company that does one-time work for customers can often layer in maintenance agreements, service contracts, or annual check-ins that bring those same customers back on a schedule.

Done well, this can actually increase the business’s value significantly, and make your life as the owner considerably easier in the process.

If you want help going through the process of finding, negotiating, and closing your first business acquisition, join the Acquisition Ace community, where we help thousands of members learn how to do business deals the right way.

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