How recurring revenue affects valuation
Why contracted revenue is worth two to three times what project revenue is worth, the four tiers buyers actually distinguish, and how to move revenue up a tier before you sell.
Two businesses at €500,000 of EBITDA. One earns it from twelve-month contracts that renew automatically. The other from projects won one at a time. The first will sell for roughly double.
Nothing about the earnings explains that. The difference is what a buyer believes about next year.
The four tiers buyers distinguish
Owners tend to describe anything that happens more than once as recurring. Buyers grade it much more finely.
| Tier | Definition | Effect on multiple |
|---|---|---|
| Contracted | Multi-year, notice period, automatic renewal | Full premium |
| Recurring | Renews by default, cancellable at will | Most of the premium |
| Repeat | Same customers return, no obligation | Modest |
| Project | Won individually, each time | None |
The gap between contracted and repeat is where most of the value sits, and it is often a paperwork problem rather than a commercial one. Customers who have bought monthly for four years will frequently sign a twelve-month agreement if asked — and that single change moves revenue up two tiers.
Why the premium exists
At 5× EBITDA a buyer pays five years of earnings for the risk that year six exists. Contracted revenue makes year six visible on a document. That is the entire mechanism, and it explains the shape of the effect:
- 0–30% recurring
- no premium
- priced as a trading business
- 40–70% recurring
- the steep part
- where fixed costs get covered
- Above 80% recurring
- revenue basis
- priced on ARR, not earnings
The jump is not linear. Going from 20% to 40% moves the number little; going from 45% to 70% can move it a great deal, because that is the point at which the base covers the fixed cost of the business.
The two figures that decide the premium
Churn. A 5% annual churn business and a 25% one are not in the same market, whatever their recurring percentages say. At 25%, the "recurring" base rebuilds itself every four years, which is a sales operation wearing subscription clothing.
Net revenue retention. Whether the cohort you had last year is worth more or less this year. Above 100% — existing customers expanding faster than others leave — is the single strongest valuation signal a subscription business can present, and it is why software commands the multiples covered in revenue multiple explained.
Moving up a tier before you sell
- Convert repeat customers to twelve-month agreements — most will sign if the price is unchanged
- Add a notice period; thirty days of visibility is worth more than it costs
- Move renewal from opt-in to opt-out where the law allows
- Split maintenance and support out of project fees into a standing agreement
- Start measuring churn monthly, a year before you sell, so you have a trend rather than a snapshot
Twelve months is enough to change the tier. It is not enough to change the churn rate, which is why the measurement should start earlier than the contract work.
What it does not fix
Recurring revenue concentrated in three customers is still concentration. A contract is only as good as the counterparty's willingness to keep signing, and a buyer will ask when each one renews — hoping the answer is not four months after completion.
What buyers look for covers how this is examined in practice.