VFD Transparent logo

How Can We Help?

Valuation: Recurring Revenue Stream

You are here:

When valuing a business, the appropriateness and weight given to each valuation method often depends on the specifics of the industry, the business’s financial structure, and its growth prospects. However, for a services business with recurring revenue streams, some methods will generally be more relevant than others.

Here’s a general guidance on weighting for each scenario.

High Recurring Revenue Stream

Valuation MethodWeightingRationale
Return on Investment (ROI) ValuationLow (5%)While ROI is always of interest, businesses with high recurring revenue may be valued more on their stability and growth potential.
EBITDA MultiplierMedium (15%)EBITDA provides a clear picture of operational profitability without the effects of financing decisions.
Simple Cash PaybackLow (5%)High recurring revenue businesses typically have longer horizons; simple payback might be too short-sighted.
Revenue Multiplier ValuationHigh (25%)The predictability of recurring revenue can make revenue-based multipliers particularly relevant.
Balance Sheet ValuationLow (5%)Service businesses often have fewer tangible assets, making this method less relevant.
Discounted Cashflow Valuation (DCF)High (35%)Predictable, recurring revenues lend themselves well to DCF analyses since future cash flows are more easily forecasted.
Cash Flow ValuationMedium (10%)Steady recurring revenue makes cash flow a relevant metric, but DCF might capture future value more accurately.

Low Recurring Revenue Stream

Valuation MethodWeightingRationale
Return on Investment (ROI) ValuationMedium (15%)Investors will be keen to understand ROI given the less predictable revenue.
EBITDA MultiplierMedium (15%)EBITDA remains relevant but might be less predictable.
Simple Cash PaybackMedium (20%)The uncertainty of revenue makes understanding payback periods more crucial.
Revenue Multiplier ValuationLow (10%)Given the inconsistency in revenue, this might be less reliable.
Balance Sheet ValuationMedium (15%)In the absence of strong recurring revenue, tangible assets might be more closely scrutinized.
Discounted Cashflow Valuation (DCF)Low (10%)Less predictable revenue makes accurate forecasting challenging.
Cash Flow ValuationMedium (15%)Understanding how much cash the business can generate becomes crucial, given the unpredictable revenue.

It’s worth noting that these weightings are general guidelines. The specific nature of the services offered, industry benchmarks, competitive landscape, and other factors would also influence the weightings.

Always consult with a valuation expert or financial advisor when assessing a business’s worth.

Table of Contents