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Recurring Revenue is the Key to Boosting Your A/V Business’ Valuation

Cameron Smith
August 18, 2017

Business valuation matters to business owners

As an A/V Reseller, you’ve built your reputation on consulting, designing, and sourcing hardware deals on behalf of your customers. They buy cameras, mics, TVs, paneling – perhaps some expensive video bridges. A full conferencing hardware deployment can be very profitable.

But given the project-based nature of the A/V industry, resellers face a challenge when it comes to business valuation. Future income is tough to predict beyond what’s currently in the sales funnel, and fluctuations in quarter over quarter results, or even just uncertainty in the market, can make stakeholder and investors wary.

Whether you plan to sell the company in the next few years, raise capital, plan to go public, or even to pass it on to the next generation, you want your company to be as appealing and stable as possible on the business-for-sale market.

How is your company valued?

When considering the purchase of your company, the prospective buyer will want to know how quickly and reliably they can make back their investment and what the future returns will be. The better you can prove that their investment will pay off within a few years, the higher they’ll be willing to offer.

Previous year’s earnings are a big part of valuation, but it also matters how consistent and how reliable and how easy those earnings can be maintained. How do you prove that the business can continue to earn and grow?

The point is that it can be difficult for A/V companies to make it appear the business will remain consistent and predictable – key factors in determining business valuation. Want to sell the business tomorrow? The value of your business is most likely worth 1-3 x last year’s EBITDA.

Is there a way to increase valuation?

Besides investing in physical assets (which will likely depreciate anyway), having a recurring, subscription revenue like SaaS is one of the best ways to create a business model that is attractive to investors/lenders/buyers.

Why does recurring revenue boost valuation?

A few reasons.

  1. Someone purchasing a company with recurring revenue streams knows that they start making their investment back immediately. They’re making money out of the gate.
  2. It’s predictable, and more insulated from income fluctuations. One can budget into the future with a higher degree of certainty.
  3. No further investment is necessary to gain customers off the bat. No additional infrastructure cost to expand. No trucks to roll, no technicians or installers to hire when selling more (and potentially having to sell and let go if opportunities dry up).
  4. They gain a base that they can then upsell. These are not one-and-done clients.

Consider:

If there are two companies with an EBITDA of $1,000,000. The first resells and installs hardware. The second resells a SaaS.

The first may be able to prove, thanks to a history of success, current funnel, market position and their own reputation, that the company will continue to grow. Anyone considering buying that business must weigh the risk of business drying up and the challenge of finding new business against the concrete numbers and funnel. There is risk here, therefore the company is valued at 1-2 x last years’ EBITDA (1-2 million).

The second company simply opens the books. If nothing changes, anyone that buys the company can make their initial investment back in 3-6 years with a considerable degree of certainty. This is a safer investment; therefore, the company could easily be sold for 3-5 x last year’s EBITDA (3-5 million).

Add recurring revenue to your current business model to boost valuation

In the A/V industry, you can have the best of both worlds. You can sell a recurring revenue service as part of large hardware deployments.

In the past, you may have sold the bridging infrastructure hardware as part of a large deployment. One and done. Now, you can still reap the upfront, bottom-line rewards of a hardware deployment, but sell the bridging infrastructure as a recurring revenue service.

Cloud services like RP1Cloud take the bridging off-site. The customer no longer needs to worry about maintenance, or having to buy for maximum potential call volume. They get peace of mind knowing that they’re covered in any circumstance. They add it to their operational expenditure and it looks after itself. It’s an easier sell than an expensive bridging.

Your company, in the meantime, collects your margin from the conferencing hardware – the video codecs, etc. – and then adds a predictable revenue stream for the lifetime of that customer.

Instant profit AND a predictable income for several years to come. Profits now, higher valuation later.