Recurring revenue counts more heavily than one-off revenue, because a buyer is buying more certainty about tomorrow's revenue. How much more heavily depends on how firmly that revenue is locked in and on a number of other factors that together determine the bandwidth of a valuation.
A buyer does not pay for revenue achieved this year, but for the chance that that revenue will return next year. A company of 50 to 300 employees that runs for 70% on subscriptions, maintenance contracts or subscription revenue has a more predictable future outlook than a company that has to win new projects every year. That predictability is one of the eight drivers that buyers weigh: it is not the revenue itself that adds value, but the fact that the buyer has to gamble less.
An example from practice: two IT service providers with comparable revenue of 15 million euros. Company A works with annual licenses that renew automatically. Company B works with project assignments that are re-tendered every year. Both companies can generate the same profit, but a buyer values company A's revenue differently, simply because the risk of revenue loss after acquisition is lower.
"Recurring" is not a fixed label. There is a difference between revenue that is contractually locked in for multiple years, revenue that can be cancelled monthly, and revenue that "usually" returns without there being a contract underlying it. A buyer looks at the notice period, the duration of the contract and the question of whether the revenue is locked in with the customer or only exists by grace of habit. Which contracts increase the value of a company is therefore a question that is not separate from the question of recurring revenue, but is directly connected to it.
A service organization with 120 employees may, for example, report 60% "recurring" revenue, but if that revenue consists of monthly contracts without a notice period with a handful of customers, that weighs differently than when it concerns five-year contracts spread over a hundred customers. The form of the contract and the distribution across customers together determine how heavily the driver counts.
Recurring revenue that largely lies with two or three customers is a different risk than recurring revenue that is spread across fifty customers. A buyer then counts the same revenue differently, because the loss of one customer has a different effect on the whole. This is precisely why what is customer concentration and why does a buyer count it is a driver that is often looked at together with recurring revenue: high recurring revenue with low customer concentration works through into a bandwidth differently than high recurring revenue with three customers that represent 80% of revenue.
A manufacturing company with 200 employees and recurring revenue of 40% through maintenance contracts, spread over a hundred and fifty customers, is in a different position in that respect than a company with 70% recurring revenue with four large customers. The size of the percentage on its own therefore does not say everything.
The value drivers scan does not place recurring revenue separately, but together with the other seven drivers in an indicative bandwidth, with the sensitivity per driver made visible. This means it is possible to see what happens to the bandwidth if the share of recurring revenue rises, or if the contract form changes from monthly cancellable to multi-year locked in. This is explicitly not a valuation and not an appraisal, but an indication of where the sensitive points lie.
Anyone who wants to know in two minutes roughly where their own situation stands can take the free test "how buyer-ready are you": eight questions with an indication per driver, including the question of how recurring revenue is built up in the company itself.
The first step is not raising the percentage of recurring revenue, but getting a sharp picture of the composition: which part is contractually locked in, with how many customers, and for how long. That inventory is often already contained in the company's own administration or CRM system, and becomes visible as soon as the eight drivers are placed side by side in a scan.
Owner dependency and the quality of management information are not separate issues in that picture, but questions about who or what actually carries the work in the company. What is transferable to people or to AI, and can therefore continue to function independently of the owner, is made clear in the work scan at ftetoai.com.