Best Businesses to Start or Buy

Recurring Revenue Business Models

Starting a business? Buying a business? If so, there's one question that you absolutely must ask. Does your new venture have a recurring revenue business model? If not, you might want to go back to the drawing board and look at other options.

The best businesses to own are recurring revenue businesses.

Recurring Revenue Business Models

If you are a new entrepreneur or are searching for a business to start or buy, you might overlook this simple fact. If so, you are making a huge mistake.

To make the most money as a business owner, you want a business model that has built-in recurring revenues.

Examples of Recurring Revenue Business Models

Here are a couple of examples of recurring revenue businesses.

One friend of mine sells telecommunications services. In short, his company sells bandwidth to companies. The offerings include T1 lines, T3 lines, OC3 lines, OC12 lines and other internet access and point to point telecom offerings.

His business is a reseller of telecom services from big companies like AT&T and MCI. He doesn't have the massive overhead that those companies have. He just sells their services and offers a small amount of first-call support services.

The business has recurring revenues because whenever he sells, say, a T1 line, my friend gets a commission on every single payment the buyer makes. In other words, it's not a one-time fee. Rather, it's an annuity. As long as the customer keeps that T1, even if it's for 10 years, my friend is making money. He only had to sell the deal once, the customer typically renews every year, and he just watches as MCI and AT&T transfer money into his bank account.

That's the beauty of a recurring revenue business. In essence, you earn money now for work you did in the past.

Here's another one. Another business acquaintance of mine sells health insurance to companies. At any given time, he has maybe 50 companies with an average of 40 employees each. I'm not sure exactly what an average health premium is for his clients but let's guess that it's $500 per month. For having sold the health insurance plan, he gets 4% of every premium payment made to the health insurance company.

So, do the math. He's making 50 X 40 X $500 x 12 X .04 per year. That works out to top line revenues of $480,000. Not bad.

He has one employee on staff...a troubleshooter who handles those situations when an employee of one his clients runs into an issue with a health insurance claim. He also has rent expenses on a small office. All in, I'm guessing he's pulling in $300,000 net before taxes worst case.

If he left the country for a year to take a long vacation, he might lose a few clients. But his able assistant could handle most of the service issues. He'd still be receiving revenues in the form of commission payments. In other words, he'd be benefiting from the recurring revenues related to work he did years ago.

Alternatives to Recurring Revenue Business Models

The mistake that many new entrepreneurs make is that they don't figure out how to build a recurring revenue business.

Instead, they earn only as much money as they deserve based on very recent efforts.

This is the taxi company business model. You get a fare, drive them, and get paid. Now, to make more money, you need to find a new fare.

There are no rewards for what you do long ago. There's no cumulative building up of revenues. It is always "What have you done for me lately?" from customers. No new sale, no new revenues.

Entrepreneurs on this track are on a treadmill. If they get off the treadmill, they stop making money.

Always Look for Recurring Revenues

The key takeaway from this article is that owning a business is not a generic concept. Every business out there has different dynamics to it, which in aggregate amount to a business model.

Some business models are better than others. As an entrepreneur, you need to evaluate the business models that are available to you and choose the most profitable...offering the maximum reward for the minimum effort and risk.

Take our word for it. The best business to buy or start will be one that has recurring revenues built into the business model. Without that, you can do OK but you will always be on the treadmill. In that case, the business owns you instead of visa versa.

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Conversation Board

Do you agree that entrepreneurs must think strategically about business models prior to choosing a business type? Do you agree that recurring revenue streams are the best way to go? We welcome all comments, questions, tips and suggestions.

  • Ed French posted on 2/23/2009
    Ed French
    I absolutely love backing recurring revenue models. But they can put extra financing strain on the startup. The ideal from my point-of-view is if an early-stage business can show that they _can_ move to an annuity model, but also have the option to charge up-front in the early stages.

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