Posted on: November 29th, 2018
Increasingly banks and other debt funds recognize the inherent value of a long term recurring contract as a leverageable asset. Managed IT services and security companies are great candidates for this approach. Despite low asset intensity, these businesses can qualify for a large multiple of their recurring monthly revenue, as long as their contracts are in order and attrition is healthy.
Multiples are based on monthly revenue and can range from 15 to 25 times. This formula is dramatically more generous than an asset or income based approach on these business types.
Lenders understand that these contracts provide a high level of collateral liquidity should the loan sour. The lender can either sell a portion or the entire book of contracts to get out of the loan.
Tech companies investing in growth with high customer acquisition costs, can use the proceeds of these loans to offset the upfront investment and grow at an accelerated rate.
While some lenders are purists and only will back software companies that sell their own product on a SaaS basis, others take a broader view of what can qualify. If your business does security, managed IT services and even field services, you can likely qualify.
This increasing focus on recurring revenue from lenders gives every business, whether it is low tech or high tech a good shot at attracting large amounts of capital at low prices. In addition to opening up new lending options, pursuit of recurring revenue is a valuable strategy for your business.
Generation of recurring revenue via service contracts is time tested strategy of many project heavy businesses. Through this, companies balance out their single project exposure and add high margin, repeat business.
This locks the customer in, provides revenue diversification and more value for an eventual exit. Here are 4 tips to help you monetize recurring revenue options for your business.
- Productize your service – many companies provide repeat staffing services to clients on a time and material basis. Much of this staffing can be repositioned and productized as managed services with long term contracts. If you are providing critical services and have been for a while, most clients will eagerly adopt a multi-year managed approach.
- Make it a standalone business unit – Service needs it own operational foundation and marketing presence. It is difficult to deliver unless it has its own team and management focus.
- Use the right contract – lenders can only lend against your recurring revenue if your contract is standard and possesses the technical elements they need. Make sure your contract conforms to the industry norm and does not contain unusual language.
- Build a strong reporting dashboard – you need to have strong reporting of the monthly ins and outs of your recurring contracts, so that you can quickly explain your attrition and the level of new contract revenue added.