Why the way your customers buy from you drives your businesses value

A lot of businesses are run on a transactional basis where customers buy once and then they leave. Watch this video about the different revenue streams and the impact they have on how much your business is worth.

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So over the weekend, I was watching a interview with John Warrillow, who’s one of the world’s leading experts on business valuation and sale. And I’ve watched this video quite a few times because it’s one of the business videos I’ve seen in a long time. But what John Warrillow says, and I completely agree with him, is a business where you have transactional sales, so a customer comes in, buys something, maybe you’re in a shop, maybe you’re sending a one off thing on the internet, they go in, buy it once and then they leave, is worth drastically less than a business that has a subscription based element, and ideally, a subscription based element with some sort of upfront setup cost. So I’ll explain why.

So John Warrillow observed that, I can’t remember the exact industry, but essentially, it was in … No, so I’ll mention it in my next video. But John Warrillow observed that a business that’s transactional essentially will typically sell for one quarter of its annual sales value. So let’s say this business is turning over a million pounds a year. Then if you’re just doing one off transactions, then essentially your business is probably worth about 250,000 pounds in good will, plus whatever stock and other assets you have. So then what John Warrillow observed is a business that is based on subscription type model, where people automatically just keep rebuying because they’re are set up to have the money taken and a product delivered and has some kind of setup fee, that kind of business is worth about four or five times its annual revenue in terms of good will.

So what that means is a business where you don’t have to worry about regenerating those customers and that customer doesn’t have to about continuing to have to buy it from you because it just happens automatically, if that’s turning over a million pounds, then that business is probably worth four or 5 million. So it’s a big, big difference. So either 250,000 in good will or 5 million in good will. There’s massive difference.

And the next challenge is essentially understanding how you apply a subscription model to your industry. For some industries, it’s easier than others. But from my observations, it is actually possible in every industry if you niche enough. By niche enough, I mean, when you’re a plumber, if you focus on one particular type of building or project, if you’re into car sales and you focus on one particular type of car, it gives you the opportunity to establish expertise in that particular area and then create related content and subscriptions, which people will essentially pay for.

So what I’m going to do is, in order to keep these video short, I’m going to do another part to this video, although I’m aware this videos part of the six part series on what drives the value in business. But I’m going to do another part to this video, which talks about the different types of revenue you can get in a business and I’ll rank them in terms of least valuable and then the most valuable. So if you found this useful, and you want to talk about how to enhance the value of your business so that one day, it might not be today or tomorrow, but one day when you’re ready, you can actually sell it and make a really, really healthy profit from doing it, so get in touch during a quick 15-minute discovery call where we can advise you on the best way forward : https://n-accounting.co.uk/#contact

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Free online training for small business owners

How to Create an Exit Strategy...

This session will cover:

  • The THREE things stopping you from scaling your business
  • The ONE thing you MUST do if you’re serious about exiting on a high
  • The tried and tested model you must implement NOW to lock down a high-value business sale later

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