The three pillars of cashflow (Part 2)

This issue is part two of a three-part series on the “three pillars of cashflow.”

These are my core rules of thumb to tell whether a business is worth investing in, no matter the industry.

You can read part 1 here:

• The three pillars of cashflow: Part 1

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And now we come to the second pillar of cashflow...

Pillar #2: Recurring revenue

Look for businesses that offer a service (or product) that people use at least two times per year.

To echo what I said in part 1:

This makes a lot of construction businesses a terrible pick.

For instance, a kitchen remodeling business does NOT offer recurring revenue. You’re not going to remodel a kitchen twice in one year. It’ll be more like once every 10 years.

There are many different types of recurring revenue businesses

They might generate income through:

• Subscriptions (SaaS companies, etc.)

• Products that people have to buy on a weekly/monthly basis (supplements, household supplies, pet food, etc.)

• Service contracts and maintenance contracts that have to be done monthly, quarterly, or every six months

The possibilities are endless.

However...

If you buy a business that offers a physical service, there are a few other factors to watch out for.

This mostly applies to first-time business buyers who don’t know the ropes yet:

Avoid any business whose income is project-based.

For instance: an HVAC company that makes all of its revenue by installing air conditioners into people’s homes.

It’s easy to get lured in by a project-based business that’s selling for a low price.

But when multiples are low, it’s usually because the business is less valuable.

Let’s take the HVAC company example.

If all your revenue is coming from installing air conditioning systems, you might get a nice $10,000 to $15,000 payment per job.

But this presents a big problem:

Now you have to find a new customer to do that with, every time.

People don’t usually get air conditioners installed multiple times per year.

So you’ll be stuck focusing on client acquisition instead of doing the work that pays the bills.

That said...

If you’ve got some experience with running a business, it is possible to turn project-based income into recurring revenue.

Here’s what you could do for the HVAC company:

Any time you install a new HVAC system, get the customer on a yearly maintenance contract.

They pay a couple hundred bucks. You go out there a few times a year and do maintenance.

Each time you do, upsell them on different services and upgrades.

Now, each customer can be a recurring revenue source instead of a one-time project.

Plus, if that business is bringing in recurring revenue (instead of project-based), it’ll be worth a higher multiple if you ever want to sell it.

We’ll wrap up with the final pillar in Part 3

Want me to send you potential deals?

Just fill out the 2-minute survey below.

As I come across deals I think my subscribers might be interested in, I’ll send them your way:

👉 I want to buy (or passively invest into) a small business

Or if you have a small business you want to sell and you’re looking for buyers, fill out the survey below:

👉 I want to sell my business

Onward,

— Ben Kelly