Our customers are on month-to-month subscription agreements, and the buyer is trying to discount our recurring revenue valuation by treating our sales as transactional. How do we prove the longevity of our revenue to secure a recurring revenue multiple?

Question

Tyler Smith · Accepted Answer

Buyers love recurring revenue, but they will look for any excuse to treat your month-to-month subscription revenue as volatile, transactional cash flow. If your clients are not locked into long-term contracts, the buy-side due diligence team will attempt to apply a lower market multiple to your business. To defend your recurring revenue valuation, you must use the Capitalization of Earnings method to prove the stability and predictability of your cash flows. Rather than focusing on the legal terms of your contracts, show the buyer your historical Net Revenue Retention and customer lifetime value metrics. Use your weekly EOS® Scorecard to present a clean, multi-year history of low customer churn and consistent monthly recurring revenue. When you can prove that your month-to-month customers behave like contracted accounts, you shift the conversation from contract terms to historical cash flow predictability. This stability justifies using an income-based valuation approach rather than a discounted transactional approach. By showing that your automated customer retention processes are institutionalized within your operations, you prove to the buyer that your revenue streams are highly durable, forcing them to pay a premium recurring revenue multiple.