When it comes to buying and selling businesses (M&A), understanding the quality of revenue is key to estimating the stability, predictability, and resilience of the business. That's why a thorough analysis distinguishes between recurring and non-recurring revenue, two concepts that have a direct impact on a company's valuation.
What is recurring revenue?
Recurring revenue is revenue that repeats on a regular, predictable basis, such as revenue generated by:
- Monthly or annual subscriptions
- Maintenance or support contracts
- Renewable licenses
- Asset leases
- Agreements as a primary supplier
This type of revenue provides financial visibility and makes it easier to project future cash flows with greater confidence.
Practical example
Imagine a B2B SaaS company that charges €500 per month per license. With 200 customers, it generates €100,000 a month. Thanks to this recurring revenue, it can:
- Accurately predict its future revenue.
- Attract investors interested in stable, scalable models.
- Reinvest in development or marketing with greater confidence.
Not all businesses are equally able to generate recurring revenue. A bottle manufacturer, for example, usually has annual contracts with beverage companies, while a retail hardware store depends more on one-off sales.
What is non-recurring revenue?
By contrast, non-recurring revenue is revenue that doesn't occur on a regular basis. It usually comes from:
- Occasional asset sales
- One-time or special projects
- Indemnities or compensation payments
- Extraordinary grants
A typical example is a consulting firm that generates €1 million a year from recurring contracts but one year sells a commercial property for €300,000. That income won't recur and should be recorded as extraordinary so as not to distort operating profitability.
Why does recurring revenue increase a company's value?
In M&A processes, a company with recurring revenue is seen as more stable, predictable, and resilient to crises. This translates into a higher valuation for several reasons:
1. Lower risk thanks to predictability
Having recurring revenue makes it possible to estimate future cash flows accurately. This reduces the risk premium used when discounting those cash flows, raising the company's present value.
2. Higher EBITDA and ARR multiples
Companies with recurring models are usually valued at higher multiples of EBITDA, revenue, or ARR (annual recurring revenue). For example, a SaaS company can reach 8–10x its annual revenue, compared with a business with one-off sales that might only reach 2–4x.
3. Improved customer acquisition cost (CAC)
By generating recurring revenue, customer lifetime value (LTV) increases, spreading CAC over the years.
4. Greater resilience in a crisis
Stable contracts protect revenue in adverse economic conditions, ensuring more consistent cash flow.
5. Easy scalability and exponential growth
Each new recurring customer adds stable revenue, accelerating growth and creating a network effect that's attractive to investors.
Quick comparison
Two companies with the same €10 million in annual revenue aren't worth the same if:
- One achieves it through recurring contracts with many customers.
- The other achieves it by selling assets or through one-off projects.
The first will be more valuable to any buyer.
How do buyers analyze revenue quality?
During the M&A due diligence process, the sources of revenue are examined in depth. A good report will detail:
- What portion comes from stable contracts or renewable licenses.
- How much depends on one-time or extraordinary sales.
- The degree of concentration in a few customers.
- Sector and geographic diversification.
In addition, on a technical level, non-recurring revenue is usually excluded from adjusted EBITDA so as not to artificially inflate profitability, and much lower multiples are applied when valuing it.
Conclusion: the key to buying or selling at a fair price
In short, knowing the proportion of recurring and non-recurring revenue is essential to valuing a company correctly. It helps you avoid overpaying for a business that may not be able to sustain its profits over time, or selling for less than it's worth if your company has a predictable, scalable model that justifies a premium.
