What is the perfect revenue mix for an operator who is considering the sale of their business? I’m frequently asked that question. While there is no completely right answer because the industry and consumer needs are constantly changing, recurring revenue is one type of income that is truly valued by buyers. It’s something to think about as you walk up and down the aisles at the NAMA Show in Dallas.
Recurring or repeat?
As business consultant Chris Cahill wrote in a 2023 LinkedIn article, “Recurring revenue became all the rage when subscription business models sprang from the fertile e-commerce soil, but it’s been around a long time – think health clubs. This focus has reached main street and many of the small and medium sized businesses listed for sale today claim to have recurring revenue in a way that I don’t think passes the smell test and is actually more appropriately labeled repeat business.”
Obviously, Cahill never considered the incredible recurring revenue opportunity that comes with being in the convenience services industry, especially when solid location contracts clearly spell out the predictable nature of recurring revenue from the following sources:
1. Point-of-use water rentals
It’s like an annuity. Not glamorous, but steady income on a monthly or quarterly basis. Consider the profitable nature of 500 water units being rented for just $35 a month. That’s $17,500 a month or $210,000 a year – pretty much bottom-line income. A whole new generation of more expensive and stylized water dispensers are becoming increasingly popular and are generating higher rentals, often, way north of $100 a month.
Many of my M&A clients have told me that water rentals are their favorite part of the business, totally under the radar and always a savings for customers compared to bottled water. It gets even better because water quality is a critical issue – it’s such a hot button that customers are willing to pay for not just annual filter changes but also semi-annual and even quarterly changes. Price will vary depending on the filter, but keep in mind what a plumber would charge just for walking in the door. Filter changes need to be a positive revenue event for operators – added recurring income that will increase the value of an operator’s business.
2. Ice machine rentals
In any reasonably amenity-oriented company, ice machines are fast becoming a basic item in the workplace. Unlike point-of-use water units, ice machines are expensive and service intense. Accordingly, operators sometimes charge $200 to $300 a month for a single ice machine. Once the unit is paid off, ice machines are a strong source of recurring revenue, especially if a quarterly maintenance fee and of course, filter changes, can be added to the price.
3. Brewer rentals
Our team frequently sees two types of brewer rentals in M&A deals, both of which are attractive to buyers. The first, rentals associated with bean-to-cup brewers. This type of rental has a high acceptance rate among customers, is a nice way to offset the cost of these expensive brewers ($95 a month for three years goes a long way in that direction) and ultimately offers the operator another reliable recurring revenue source.
The second type of brewer rental relates to low-performing locations. That special client, who requires five drip brewers in their sparsely populated and spread-out office, needs to pay a monthly rental, ideally defined in their contract, for every brewer station that does not generate a pre-defined revenue minimum. When this type of rental results in a complaint, and it can, the answer is simple. “Buy more products, spend more money and the brewer rental will be gone.” Either way, it’s a winning scenario for the operator who either enjoys another recurring revenue source or increased sales, when the company backs off on their Costco purchasing, giving it back to the operator.
4. Fuel and delivery charges
One of my M&A clients, who was a year away from selling their business, told me they never attached a fuel surcharge or delivery charge to the 600 locations they were serving, because they felt it gave them a competitive advantage to not add such a charge. Pointing out the value of recurring revenue, I urged them to give it a try at $5.00 for fuel and $9.50 for delivery – a total of $15 on every route service or special-order invoice. As I pointed out, if a customer complains about the charge, waive it.
The first month, there were 912 delivery invoices. The charges came to $13,680 for the month. There was a total of five customers who complained – a total of 13 invoices that required credit. Meanwhile, my client generated over $125,000 in new, recurring annual revenue and was now anxious to discuss other forms of recurring revenue.
Why is recurring revenue so important? Because it is one of the defining characteristics of a premium company. While many operators have excellent companies, recurring revenue in the hundreds of thousands of dollars moves a company into the premium category – one that generates numerous offers at higher multiples from buyers. At the NAMA Show in Dallas, look beyond the equipment you see and consider how that equipment can result in predictable recurring income.
ABOUT THE AUTHOR
Mike Kelner of VBB Advisors has been a senior business intermediary in the refreshment services industry for over 30 years, representing sellers exclusively. He can be reached at [email protected] or 704-942-4621.
