A recurring revenue business or CRV is one that relies on repeated transactions to keep its doors open. This can be for monthly services, yearly memberships, a quarterly membership, weekly classes, and so on. These types of businesses have become increasingly popular in our society as we rely more and more on technology every day.
The most famous example of this is Netflix. They offer unlimited movie streaming with no expiration dates! You pay per month rather than up front, which some may consider better since you never know how many movies you will watch in a given period.
Another good example is Amazon Prime. This service gives you free two-day shipping and access to their vast library along with other benefits like TV shows and entertainment features.
Recurring revenue is not exclusively limited to software and digital products. There are many tangible ones as well. For instance, fitness facilities often have annual memberships where people get one year of access to the gym for a set price.
This article will talk about why these businesses exist and what factors influence their pricing.
When determining the fair market value of a company, there are several key factors that must be considered. The most important factor is finding an appropriate valuation method or model.
A variety of models can be used to determine the intrinsic value of a company. Many experts agree that using the price-to-sales ratio is the best approach in this case. This model compares the current sales levels of a firm against its own past performance to come up with a price per unit sale.
The price per unit sale is then compared to the cost of buying out the other shareholders to calculate the total shareholder equity. From here, we can apply the same theory to compute the value of the firm as a whole. By taking the average of all these individual numbers, you get your final estimate.
The next step in determining if a company has sustainable, long-term value is applying the key factor tests to their market position, or what they offer, and how much of it they have. These factors include:
These four factors are important because without them, the company would not be able to stay competitive nor make enough money to justify their current price tag.
But before you dive into hard numbers calculations, there is one more test that can help determine whether a company is undervalued or overpriced.
The dividend yield test is an effective way to assess the relative attractiveness of a stock as well as determine if the current share price is fair. Companies with high dividends deserve some respect, as they invest in the future for shareholders through capital gains and dividends.
By comparing the average dividend payout per share against the median price per share of all the stocks in the marketplace, we get an efficient level ratio which tells us if the stock is paying its dues and buying time, or if it is still growing rapidly due to investor excitement.
This article will go deeper into these concepts by doing a full analysis on a recent investment pick.
The second way to determine if your business idea is worth investing in is by calculating the value of the business using what’s called the EqV method. This was discussed in detail in a previous article, so make sure you read that one before moving onto this one.
The important thing about the EqV method is that it doesn’t use any underlying assumptions about how well your business will do or anything like that. What it does evaluate are the costs needed for the business, along with the average revenue each cost produces over time.
Once those two numbers are calculated, they're plugged into an equation to come up with a total business value. Then, comparing that number to the initial investment gives you your return. If the return is higher than zero, then the business is profitable!
If it's lower than zero, then unfortunately you can't really call the business successful yet. You would need to reduce either the costs or the revenues until the numbers match.
A lot of very successful companies were able to prove their worth with an impressive business plan. They may have even received some initial investment or both!
As you’ve probably noticed, however, not all businesses are designed to earn large amounts of money.
Some small businesses use the resources they have more effectively than larger corporations that seem to spend lots of money on advertising and marketing.
By practicing good financial management in your daily life, you will know how to apply this theory in action. These practices include saving money, paying off debt (or creating none), and putting away what little savings you have for important goals.
Valuing a business according to how much it is willing to invest in itself can be tricky, but there are many ways to do it. One way is by looking at net profit versus revenue.
Net profit is calculated by taking gross income and then deducting costs such as rent, employees, and utilities. If the company has a significant amount of capital invested, like buying equipment, then these expenses can be deducted later. This is why having recurring revenues is more valuable than having high-grossing months only.
This article will talk about one method for calculating the value of a business based on its net profits and also describe another approach based on its valuation per employee. Both methods assume that the market values the business at close to zero since no investor would buy it due to the low profitability.
The second way to build capital is via valuation recurring revenue businesses. This type of business model comes with its own set of challenges, but they are not as difficult as they may seem at first blush.
Recurring revenue means you will be paid for more than just one month of service from your customers. These types of companies usually have a monthly fee or subscription that they charge their clients for their services.
By having this source of income coming in every month, the company can spend money efficiently due to the constant flow of cash. They don’t need to buy expensive equipment because it will still earn them money after it is used up.
This article will talk about some successful examples of such companies and how to apply what they did to create their own business.
As we mentioned before, you will need to have your business registered as an LLC or corporation if you want to take advantage of the benefits that come with this form of business ownership. One of the first things you will need is an EIN (Employer Identification Number).
Most states require that every business be issued an EIN, even if it’s just for paper work. An individual or company can only use their own EIN once however, so make sure yours isn’t already being used by another entity!
There are some costs associated with obtaining your business’s EIN, but most companies offer a service where you pay per employee. This way, everyone in your organization doesn’t have to go through the process separately. Some people also cover state fees in addition to the employment ID number when they include this coverage in their plan.
Another option is to hire yourself as an independent contractor instead of hiring employees. In this case, you wouldn’t need to include health insurance or other benefits for your staff, nor would you need to issue them payroll cards. You could still get your employer ID numbers though by including yourself in your parent company’s documents.
A significant part of running your business is having a steady source of income to finance operations. This is true whether you are working with vendors or doing freelance work, or investing in equipment or marketing materials.
Having an adequate amount of capital can make all the difference between being able to maintain momentum and keeping up with competition, and starting over if you fail.
Running out of money can be disastrous for a business owner. If something happens and you do not have enough to pay bills, employees may need to be let go, services may stop functioning, etc. This could hurt or even destroy your business!
Business owners should always keep at least six months’ worth of monthly operating expenses in reserve in case things don’t go their way. Even better, throw in one year so it feels more secure.
While protecting your business from liability is an important part of running a successful company, setting up business insurance is also important. This includes policies such as errors and omissions coverage, professional liability policy, and workers’ compensation.
Errors and Omission Coverage protects you against lawsuits due to defective products or services you provide. A lawsuit will likely include claims for fraud or misrepresentation of features or benefits of your product, so make sure you are not leaving your client with false promises by covering less expensive alternatives!
A Professional Liability Policy covers you if someone sues you because of your job. If people claim that you hurt them, this policy would help you defend yourself in court. It can also protect you if they sue for negligence–if they allege that your actions harmed their reputation or lost income due to bad performance.
Workers Compensation typically covers medical bills and time away from work for employees who get injured on the job. This is particularly important for employers that cover health care premiums through Health Insurance Premium Discounts (HIPDs).
I have already written about how to run your own HIPD plan here but I will briefly mention it again here. You can read my article here- How To Run Your Own Workers Comp Plan For Free.
Running these types of business insurance policies does not need to be difficult or costly. Many companies offer simple software solutions to manage all three of these types of policies.