Can recurring revenue increase the value of your WordPress agency? | Freshy

There are several factors that contribute to the final valuation of your WordPress agency. Recurring revenue is often talked about when it comes to acquisitions. But is it really as important as people say?

The truth is that recurring revenue streams offer more predictability for buyers, compared to agencies that depend on one-time sales. It enables prospects to forecast future earnings accurately, which reduces the risk associated with the purchase.

In this post, we’ll take a closer look at how recurring revenue impacts the value of your agency. Then, we’ll explore some common types of recurring revenues, and discuss key details to know before entering negotiations. Let’s jump in!

How does recurring revenue increase your agency’s valuation?

Let’s take a look at the reasons why recurring revenue makes your WordPress agency more valuable to buyers.

1. It demonstrates strong customer relationships

Evidence of recurring revenue, particularly in the form of long-term contracts, shows a strong track record of client satisfaction and loyalty.

Naturally, this lowers the risk of the acquisition since it indicates that existing clients are likely to continue doing business with your agency. It also speaks to the quality of work, communication standards, and team capabilities which are factors that buyers look for.

Let’s say you’ve been working with the same client for five years. You’ll likely have touched base regularly via scheduled meetings, progress reports, and contract negotiations. This provides evidence of continuous engagement with your agency and showcases a high customer lifetime value (CLTV).

2. It offers more predictability

The most obvious benefit of recurring revenue is that it offers a greater level of stability and predictability for buyers.

Businesses that rely heavily on one-time sales face the ongoing pressure of acquiring new customers, which isn’t always easy. It also makes it impossible for buyers to evaluate whether there’s a solid foundation for future growth.

On the other hand, recurring revenue enables prospects to accurately forecast future earnings. Acquiring an existing agency is already less risky than starting one from scratch. But with the additional advantage of established contracts and a steady income stream, there’s a greater assurance of success.

On top of this, recurring revenue enables buyers to make informed business decisions. For example, they can determine when/how to devise growth strategies (e.g. product development or new market expansions). Meanwhile, the steady cash flow allows for better financial planning.

Plus, it can be easier for buyers to secure financing from lenders when it comes to purchasing WordPress agencies.

And while we’re on the subject of financing, the predictability of recurring revenue also allows agencies to manage expenses more efficiently, by anticipating possible ebbs and flows in revenue.

3. It’s popular with clients

Another reason why recurring revenue can increase the value of your WordPress agency is that it’s very popular with clients.

Last year alone, 50 percent of global consumers subscribed (or planned to subscribe) to subscription services due to their convenience. There’s been a huge increase in businesses adopting a subscription-based model including streaming sites, meal delivery services, and phone networks.

The automated delivery/payment system means that clients avoid the hassle of actively placing repeat orders. Plus, they don’t need to worry about losing access to your service(s). On top of this, the predictable monthly fee makes it easy for individuals and businesses to manage their budgets.

Not only that, but it offers a greater degree of flexibility and enables clients to scale/alter the service to suit changing needs. There’s no need to rewrite the contract. Instead, you can simply speed up or slow down the output.

4. It reduces risk of volatility

As we’ve already mentioned, a guaranteed stream of income can drastically lower the risks involved in acquiring a business.

One of the ways that it does this is by reducing the volatility associated with the sale of your WordPress agency. You can demonstrate a sustainable business model that’s less likely to succumb to external factors like fluctuating market conditions and threats from competitors.

We’re not saying that these variables won’t ever impact the revenue predictability and growth potential of your business. However, from the eyes of investors and buyers, it certainly makes it a safer acquisition compared to traditional sales models.

5. It offers enhanced profitability

We’ve talked about how recurring revenue provides more predictable profits. But it can also maximize them, which makes your agency highly appealing to buyers.

For starters, recurring revenue businesses face much lower customer acquisition costs. If you focus too much on one-time sales, you have to consistently invest time, effort, and money into generating new leads.

However, if you set up recurring revenue streams, you only have to put the work into acquiring the client once. Then, it’s arguably easier to retain clients, or encourage additional spending on add-ons or cross-sales.

The predictable payment schedule also makes you less reliant on sales spikes. And, recurring revenue businesses tend to enjoy higher profit margins since you can deliver your services at slightly lower costs once the initial relationship has been established.

6. It facilitates seamless integration

The final reason why recurring revenue can drive up your agency valuation is that it allows for easy integration into existing operations.

Typically, businesses that enjoy a steady stream of income have established processes and client relationships in place. This enables buyers to slot smoothly into the workings of your agency, with minimal disruption or need for experimentation.

It’s also worth noting that recurring revenue businesses tend to be easier to operate in terms of pricing. By packaging services up as products in different pricing brackets, you can make adjustments to your offer/price as needed. This is easier than dealing with lots of individual products or providing custom quotes for each client.

Common types of recurring revenue

Now, let’s take a look at the most common types of recurring revenues to help you get some ideas:

• Service agreements refer to services that clients sign up for over a specific period of time. In the WordPress space, popular examples include ongoing maintenance plans or consulting services.
• Usage-based models occur when you derive revenue streams from the ongoing consumption of a product/service. One of the most common types is web hosting.
• Subscriptions charge clients for consistent access to services, typically on a monthly or yearly basis. This includes memberships, SaaS models, and long-term contracts (such as multi-year agreements).
• Licensing and royalties enable you to earn a recurring fee by allowing others to use intellectual property (like trademarks, patents, and copyrights).

Naturally, this list isn’t exhaustive. But these are the main ways that WordPress agencies can set up recurring revenue streams.

How to increase recurring revenue in your WordPress agency

Before you value your WordPress agency, here are some ways to increase your recurring revenue to maximize the sale price:

• Improve customer service. It sounds simple, but one of the easiest ways to retain clients is to offer excellent customer service. It’s important to be helpful, and responsive, and go above and beyond to address client needs or problems. This will help you boost brand loyalty and maintain long-term relationships.
• Ask for client feedback. The quickest way to find out how clients feel about your service is to simply ask them for feedback. You can then use their insights to make strategic changes. You can communicate with clients using newsletters, surveys, or social media.
• Continually acquire new clients. One of the biggest mistakes that sellers make is focusing too much on retaining existing customers while neglecting to acquire new ones. You should be actively trying to find new clients via marketing strategies, referral programs, or introductory offers.
• Optimize sales funnels. The best way to reduce churn is to identify when and why clients drop off in your customer journey. This way, you can analyze existing processes and discover problematic areas. You can then use this information to optimize the sales funnel and improve conversions.
• Regularly review prices. It’s tempting to stick with prices that clients have already agreed to. But it’s a good idea to review prices regularly to make sure that they align with market conditions and competitors’ prices. We always recommend communicating price adjustments transparently and well in advance of contract renewals.

All of these factors can help you retain existing clients and extend customer lifetime value. You might even be able to attract new leads and increase signups for monthly maintenance packages or retainer agreements.

What will a buyer want to know about your recurring revenue?

Recurring revenue is seen as a huge asset to prospective buyers. But there are certain details you’ll need to know to handle negotiations effectively.

Here are some things that buyers might enquire about:

• Client satisfaction. You can demonstrate this through long-term client relationships, but some buyers may be interested in your net promoter score (NPS).
• Renewal rates. A good sign of quality customer service and high standards of work are renewal rates. How many clients renew their contracts and continue to give you their business?
• Churn rates. High churn rates can be an indicator of serious issues in your WordPress agency. This refers to the number/percentage of clients that stop doing business with you.
• Average lifetime value. Buyers may look to see how many clients are signed up for long-term or multi-year contracts to determine the average lifetime value.
• Customer base diversity. A range of clients offers more stability and assurance for potential buyers. Even if you can demonstrate a healthy amount of recurring income, this is unlikely to be appealing to prospects if it’s solely dependent on just one or two accounts.
• Expansion revenue. This enables buyers to see how well you utilize your existing client base. It refers to additional revenue that comes in through add-ons and cross-sales.

All buyers are different, so there may be extra factors that people will be interested in. For example, some companies might want to see how much of your overall profits come from existing clients vs new clients. Or, they might like to know how much of your work consists of individual projects.

Where to find a buyer for your WordPress agency

Although we’ve discussed the importance of recurring revenue for your agency valuation, it isn’t the only way to secure a qualified buyer. This will likely carry more weight if you enter negotiations with investors or strategic buyers.

However, Freshy is interested in WordPress agencies of all sizes, niches, specialisms, and client volumes:

The benefit of selling to an established WordPress business is that you’ll place your company in the capable hands of over 40 experienced team members. Freshy delivers a variety of services including WordPress development, web design, search engine optimization (SEO), and more.

We have a dedicated in-house support team that ensures a smooth transition for all of your clients. Better yet, Freshy can demonstrate a strong track record of successful acquisitions and mergers. And all it takes is filling out this simple form to kickstart discussions.

Conclusion

Before listing your WordPress agency for sale, it’s a good idea to add value to drive up the purchase price. One of the ways you can do this is by setting up (or increasing) recurring revenue streams.

This lowers the risk for buyers since it provides a greater level of stability. Plus, it can speak to the profitability of your agency post-sale. During negotiations, you’ll be able to demonstrate low churn rates and high renewal rates to make your business more appealing.

If you’re ready to consider buyers for your WordPress agency, Freshy is a great option. We’re interested in agencies of any size, niche, or client base. Plus, we have a dedicated support team to facilitate a smooth, speedy sale. Fill out this form to start the conversation!

Featured image credit: Pexels.