Seldom is a Business worth what we think
It’s the hard truth that most leaders of value added resellers (VAR’s), IT Solution Providers (ITSP’s) and Managed Service Providers (MSP’) fail to acknowledge and then ultimately underestimate the disruption being caused by customers increasing preference to consume all things IT on a monthly basis, whether that be traditional managed services, digital transformational services (IoT) and the cloud. For the remainder of this piece I’ll refer to this as monthly recurring revenue or the subscription-based economy.
The short-term effect rears its ugly head as softness in their business and a shift in business to recurring revenue friendly businesses.
The longer-term effect manifests itself in the precipitous drop in their businesses enterprise value and what the business is ultimately worth at the time of exit.
For many, the exit determines the financial freedom the owner enjoys in retirement. Most entrepreneurs and senior leaders have a great deal of their net worth tied up in their businesses.
Countless conversations of late reveal a frightful trend towards owners not confronting the ultimate reality - the subscription-based economy is undermining your company’s worth and if you don’t add a viable, vibrant and scalable monthly recurring revenue component to your business – your exit 12 – 24 or 36 months from now will be hollow, much like the center of a zero…
I believe my opinion has some worth, however, more importantly the likes of Joe Panettieri (@JoePanettieri) at ChannelE2E in conjunction with Paul Dippell (@pdippell) of Service Leadership have done some solid work on this subject and the numbers don’t lie.
Exiting from ones business today will be underwhelming if you don’t have a significant monthly recurring revenue stream or true intellectual property. If you have $30M in revenue and your business mix looks something like this:
Product = 64%
Professional and Onsite Services = 21%
Support Services = 10% (you have a PSA & RMM Tool, but annual upfront contracts)
Other = 5%
The rough non-scientific approach and back of the napkin approach to providing a simple valuation - leveraging some of the information provided in in ChannelE2E’ Podcast 059: Service Leadership CEO Paul Dippell – click link here to listen to podcast would be somewhere in the ballpark of $3.2M - $5M.
Fast forward three (3) years and assuming no dramatic changes in business mix and no orchestrated effort to add a significant subscription-based revenue stream that same business would be worth only $981K – 1.64M. It’s a melting ice cube.
To reiterate, the quick and dirty estimates above are not intended to peg the businesses exact worth, there are many variables that move the needle North or South.
Rather the goal is to paint a reasonable picture that shows the magnitude of the disruption that is occurring as the market choses to consume IT services on a monthly basis - the shift that is occurring and the numbers being posted are just too compelling to think otherwise.
So, if you’re thinking you can avoid the inevitable, you can’t. This is all actually happening and based on numerous conversations I had at Cisco’ World-wide Partner Summit it’s happening at a pace and volume that has caught Partners off guard and many admitted they are scrambling to deal with the threat posed by both new and legacy competitors who are already on the recurring revenue dance floor.
It’s time to iterate and add a truly scalable, significant and profitable monthly recurring revenue component to your business mix. But understand this is a 12 – 18 month journey for most organizations and requires the same focus and rigor that building your current business did when you launched it.
The next move is yours, your financial freedom depends on it…
Remain Calm and Cloud On…