One of the most eye-opening lessons I’ve learned in acquisitions is how much recurring revenue changes the game. When I first started buying businesses, I thought revenue was revenue, whether it came from repeat customers, one-time projects, or seasonal spikes. But the more deals I’ve studied, the more I’ve realized that the type of revenue is just as important as the amount.
Recurring revenue models subscriptions, memberships, retainers, and contracts, create stability and predictability that transform how a business is valued. They reduce risk, increase multiples, and give buyers like me confidence in the future. In fact, I often prioritize recurring revenue above headline sales because of the compounding advantages it creates.
In this article, I’ll explain why recurring revenue is so powerful, how I evaluate it during diligence, and the ways it reshapes both the value and the growth potential of a business.
The Difference Between Recurring and One-Time Revenue
Not all revenue is created equal. A one-time sale is valuable in the moment, but once it’s complete, the business has to start from zero to earn more. Recurring revenue, by contrast, renews automatically. It creates continuity that smooths out the volatility of one-time transactions.
For example, a company with $2 million in annual sales but no recurring contracts starts every January at zero. They have to hustle every year to rebuild that revenue. But a company with $2 million in sales, where 70 percent is under recurring contracts, starts the year already ahead. That stability is worth far more than the raw number suggests.
Why Recurring Revenue Increases Valuation
I’ve noticed again and again that businesses with recurring revenue command higher multiples. Buyers like me are willing to pay more because the risk is lower. Predictable revenue streams reduce uncertainty, which makes cash flow more reliable and financing easier to secure.
Lenders also love recurring revenue. It reassures them that debt service will be covered. In fact, I’ve seen banks approve financing more quickly for companies with high recurring revenue, even when total revenue was smaller than other businesses.
How I Evaluate Recurring Revenue in Diligence
When I evaluate a company, I look closely at the quality of recurring revenue:
- Contract length: Are customers locked in for 12 months, 24 months, or longer?
- Renewal rates: Do contracts renew automatically, and what percentage of customers renew?
- Churn: How many customers cancel each year?
- Concentration: Is recurring revenue diversified across many customers or dependent on just a few?
- Pricing power: Are there built-in escalators that allow for price increases over time?
Strong recurring revenue means long contracts, high renewal rates, low churn, and diversified accounts. Weak recurring revenue might technically exist, but with month-to-month agreements and high cancellation rates that undermine its value.
Examples From My Own Deals
In one acquisition, recurring maintenance contracts made up more than half of revenue. That gave me confidence that even if sales slowed, the company could cover its operating costs. It also gave me leverage in negotiations with lenders, because I could demonstrate predictable cash flow.
In another deal, the seller claimed recurring revenue, but when I looked closer, most of it was handshake agreements without formal contracts. That wasn’t real recurring revenue; it was just repeat business with no guarantee. I walked away.
These experiences taught me that not all recurring revenue is created equal. The quality of contracts and renewal history matter as much as the headline numbers.
Why Recurring Revenue Compounds Growth
Recurring revenue doesn’t just protect downside risk; it accelerates growth. Because base revenue is stable, new sales add to it rather than replace what’s lost. That creates compounding effects over time.
I’ve seen this firsthand. In one business, 80 percent of revenue came from recurring contracts. Each new customer I added didn’t just boost sales for a quarter; it boosted sales for years. Growth stacked on top of growth.
By contrast, businesses reliant on one-time sales constantly fight attrition. Even strong growth can be offset by customer turnover. That treadmill effect makes scaling far harder.
Why Sellers Often Undervalue Recurring Revenue
Interestingly, I’ve found that many sellers undervalue the recurring revenue in their own businesses. They may view it as ordinary or take it for granted. That creates opportunities for buyers like me.
If I can demonstrate to the seller that recurring revenue increases the multiple, I sometimes get them to agree to structures that reward us both, for example, paying more through earnouts if renewals stay strong.
The Psychological Power of Predictability
Recurring revenue doesn’t just affect numbers. It changes how I feel as an owner. Knowing that revenue will be there next month and next quarter gives me peace of mind. It allows me to plan, to invest in growth, and to sleep at night.
That predictability also builds confidence in employees and customers. Staff know the company is stable. Customers appreciate the continuity of service. Everyone benefits from the reassurance of recurring cash flow.
Industries Where Recurring Revenue Shines
Some industries naturally lend themselves to recurring revenue:
- Software-as-a-Service (SaaS): Subscriptions are the entire model.
- Property management: Monthly management fees create consistency.
- Home services: Maintenance contracts build loyalty and predictable work.
- Healthcare and wellness: Membership and care plans provide stable, recurring income.
- Professional services: Retainers createa steady income beyond project fees.
But I’ve also seen recurring models built into unexpected places construction, retail, and even local trades. With creativity, recurring revenue can be added to almost any business.
The Risks of Overestimating Recurring Revenue
While recurring revenue is powerful, I’ve also seen buyers overestimate it. Just because customers are under contract doesn’t mean they’ll renew. Just because revenue has been steady doesn’t mean it will continue forever.
That’s why I stress-test every recurring model. I ask: What if 20 percent of contracts don’t renew? What if a competitor offers better terms? What if technology disrupts the model? By asking these questions, I avoid overpaying based on unrealistic assumptions.
Why Recurring Revenue Protects During Downturns
Another reason I prioritize recurring revenue is resilience during downturns. When markets slow, one-time sales often vanish. Recurring contracts, however, continue to generate income.
I’ve seen businesses with recurring revenue survive recessions far more smoothly than those without it. That stability not only protects me as the buyer it also protects employees and customers as well.
Final Thoughts
Recurring revenue is one of the most powerful forces in acquisitions. It reduces risk, increases valuation, accelerates growth, and provides peace of mind. Over the years, I’ve come to view it not as a nice-to-have, but as a critical factor in every deal I evaluate.
If I see strong recurring revenue, I pay attention. If I see weak or nonexistent recurring revenue, I tread carefully. Because in the end, it’s not just how much revenue a business generates, it’s how reliable that revenue will be tomorrow, next quarter, and five years from now.
I continue sharing my insights on acquisitions, private equity, and real estate at DrConnorRobertson.com, where I document the lessons I’ve learned deal by deal.