Every search fund and long-term equity publication I've ever read includes some material reference to enduring revenue or "recurring revenue". The definitions are usually kept broad with the largest variance in definition being time (year-to-year focused vs across decades).
My question for the community... What is your definition behind enduring revenue / recurring revenue that you value within your search? If you had to build a scorecard to quantify a company's enduring revenue value (scale 1 to 10), what's the definition that makes a company a '10' vs. a company that might only be a '5'?
Please share any general examples from your search experience if willing.
Thank you.
Quantifying Enduring Revenue for a Search Scorecard
by a searcher from Northwestern University - Kellogg School of Management
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A zero or one would be a 100% project or bid-based business like a job shop contract manufacturer or HVAC company that does only new construction work.
A five might be an HVAC or other service company with 50% of their revenue in long-term MRO service contracts and 50% of the business as new installations. It could also be a fitness center where all the memberships are annual contracts that auto-renew, but there is a significant customer attrition rate or low cost to terminate the contract.
A 10, in my opinion, would be a SaaS business with 80% or more ARR and 3-5 year subscriptions/contracts with a high cost of switching. Similarly, a specialty insurance managing general agency (MGA) or wholesaler offering commercial product lines that have an average customer life of 12 years and 80%+ retention would also be a 10.
I hope that helps.