We scheduled the close of one of our recent acquisitions for the 17th of the month.
That date wasn't an accident.
Every direct debit in the business ran on the 15th. Closing two days later meant we could see exactly who had paid.
Not who was meant to pay. Who actually paid.
Because that's what most agency buyers are buying. Relationships and recurring revenue.
Ultimately, every deal is guided by relationships, and they need to be strong. But in this article I'm going to stick to the numbers, because that's where we can be objective.
Recurring Revenue Is King. But Which Kind?
I've spoken to hundreds of business owners about selling their agency over the last few years.
Every valuation conversation ends up in the same place: the quality of your revenue.
In How Much Is Your Agency Worth? I covered the market range and what moves you within it. Here I want to go a level deeper on why recurring revenue changes the number.
Because recurring revenue isn't one thing. There are five different types of it.
The Five Types of Recurring Revenue
1. Prepaid revenue
If you take annual contracts upfront, you're taking all the cash at the start, with a year of work still to deliver.
Say a client pays you $12,000 at the start of the year. Four months later, you sell the business.
You've only earned $4,000. The other $8,000 is a liability: revenue the buyer now has to deliver, with no cash attached.
It feels like an asset, but on settlement day, it isn't. Because the $8,000 in cash technically belongs to the buyer of the agency, so they can deliver on the service promise for the remaining eight months.
In reality, everything is negotiable during an M&A transaction, but most people follow accounting 101.
2. Locked-in revenue
This is revenue that's contractually committed and technically enforced.
We don't do this. But I've seen an agency sign clients to 3-year commitments and never hand over their WordPress logins. Which means it's never really their website.
It can be even worse with Google Ads. Some clients don't have access to their own account and run their ads through the agency's.
Contractually, they might be able to escape. Technically, they can't leave.
That revenue recurs, but it's held in place by friction, not by happy customers.
3. Contracted revenue
The client has agreed to pay for the next 12 months.
It's commercially enforceable, but when dealing with small businesses (where a lot of them can go out of business) it's not always a sure thing.
4. Expected revenue
Based on past buying habits. They come back every year for more, but nothing's in writing.
Many business owners think this is high-quality recurring revenue. But when nothing's in writing, and you're just hoping they come back this year, it's hard for an acquirer to pay you for it.
5. Services revenue
Project work like one-off campaigns and website projects. You've got no visibility on what comes next.
Each type carries a different level of confidence. And confidence is what a buyer is really paying for.
The more confident a buyer is about next year, the more they'll pay you this year.
How Does Recurring Revenue Affect Valuation?
At the extremes, service-based businesses can trade at 1x revenue and rarely create much enterprise value. Subscription businesses with high margin and growth can trade at 10x revenue.
Most agencies sit well below that ceiling, valued on earnings rather than revenue. But recurring revenue decides where in the range you land.
A worked example
Take two agencies, each with $250K in seller's discretionary earnings (SDE).
Agency A: mostly project work, with a small book of recurring website work.
Agency B: mostly recurring website work on monthly direct debit, around $50K MRR.
Most small agencies trade at 2-3x SDE.
Agency A has little visibility past the next project. A buyer prices it near the bottom: 2x, or $500K.
Agency B has income a buyer can see coming every month. It prices near the top: 3x, or $750K.
Same earnings. A $250K difference.
That's what people really mean when they talk about an MRR multiple for an agency. The recurring dollar is worth more because the buyer can see it coming.
And the type still matters. If Agency B's recurring revenue was all prepaid, or held in place by withheld logins, a buyer would start pulling it back towards Agency A.
Two agencies with the same earnings can be worth very different amounts. The difference is how sure the buyer is that the revenue will still be there next year.
The Second Layer: Can It Move?
It's not just whether revenue recurs. It's how easily it transfers to the new person or business.
If you've got to change over every contract, every set of terms and every payment arrangement, it's going to be really hard for a buyer to get full confidence in that revenue moving into their business.
Payment gateways like Stripe and Ezidebit make this easier. They can often move the payment tokens to a new owner without disrupting the business.
Recurring revenue is only worth what you can actually move.
Back to the 17th
In that acquisition, the brand was fine but wasn't that valuable.
What was valuable was the recurring revenue on direct debit that we could move across to our business and our payment gateway.
That takes some paperwork and understandable acrobatics with the vendors. The payment gateway has to be comfortable with the transfer, because it carries some of the risk too.
Then, in the lead-up to close, some of those direct debits started failing.
Sure, those customers were on contracts and commercially they were on the hook to keep paying.
But if they're late or never pay, what is the buyer actually paying for?
So we based the acquisition purely on customers in current standing. Not the ones who were meant to pay.
It became a major friction point in the deal.
The fix was the date. All the debits ran on the 15th, so we closed on the 17th. It was the clearest benchmark of how many current customers there really were, not how many might pay in future.
Structure the close around the payment run. Then nobody has to argue about who's current.
Make Your Revenue Easier to Buy
No amount of recurring revenue lets you escape the realities of business and valuation.
But when you understand what buyers are really buying, and the different types of recurring revenue, you can make your business a lot more sellable.
Know your buckets. Sort every recurring dollar into one of the five types before a buyer does it for you.
Expect to be paid on current standing. Customers behind on payments won't count, whatever the contract says.
Put recurring customers on direct debit through a gateway that can transfer. It's the cleanest proof your revenue is real.
FAQ
Does recurring revenue increase business valuation?
Yes. Recurring revenue gives a buyer confidence in future income, and confidence is what they pay for. It's the biggest single factor in whether an agency lands at the bottom or the top of its valuation range.
Is all recurring revenue valued the same?
No. Prepaid, locked-in, contracted, expected and services revenue each carry a different level of confidence. Prepaid revenue can even count as a liability, because the buyer inherits work that's already been paid for.
What makes recurring revenue transferable?
Contracts, terms and payments that can move to a new owner without disruption. Direct debits on a gateway that can transfer payment tokens are the clearest example.