We have incredible proprietary custom software and a great reputation, but why are brokers telling me my multiple will suffer because of low recurring revenue?

Question

Tyler Smith · Accepted Answer

Buyers do not pay for your past achievements or your pride; they pay for the predictability of future cash flows. While proprietary software and a strong reputation are valuable assets, they represent latent potential rather than guaranteed income if your revenue model is transactional. When a broker warns you about your multiple, they are highlighting the risk of a high-friction sales cycle. Transactional revenue means you start every fiscal year at zero, requiring constant, expensive marketing and sales efforts to replicate last year's results. Buyers heavily discount businesses with this profile because the cash flow is volatile. To command a premium multiple, you must institutionalize your customer relationships. Convert your transactional software usage or service agreements into recurring or highly predictable subscription models. Even if the immediate top-line revenue is lower, a buyer will pay a significantly higher multiple for one dollar of recurring contract revenue than for one dollar of one-time project revenue. This predictability reduces their risk. Show them a clean EOS Scorecard that tracks customer retention metrics and monthly recurring revenue over at least twenty-four months. This proves your business has a predictable engine, which is the exact proof profile that strategic acquirers and private equity firms will pay top dollar to secure.