Recurring vs Reoccurring Revenue: Why the Difference Matters in M&A
When buyers evaluate technology companies, they scrutinise revenue quality as intensely as they examine revenue quantity. Two businesses with identical top-line figures can command dramatically different valuations based on how that revenue is classified. The distinction between recurring and reoccurring revenue is technical, often misunderstood, and consequential for exit outcomes.
Founders who do not understand this distinction often leave substantial value on the table. They present reoccurring revenue as recurring, face pushback during due diligence, and accept reduced multiples. Or they fail to present genuinely recurring revenue in its best light, missing the premium that quality revenue commands.
Understanding the distinction, and how buyers assess it, is essential preparation for any exit.
The Definition Gap: Recurring vs Reoccurring
Recurring revenue is contractually committed. The customer has signed an agreement, typically annual or multi-year, that obligates them to pay a fixed amount at regular intervals. Subscription software, annual licenses, and maintenance agreements all generate recurring revenue. The key characteristic is predictability: absent explicit cancellation, the revenue continues.
Reoccurring revenue repeats regularly but lacks contractual commitment. The customer purchases again and again, often on a predictable cadence, but is not obligated to do so. Usage-based pricing, transaction fees, and repeat project work all generate reoccurring revenue. The revenue may be highly predictable based on historical patterns, but it is not guaranteed.
The distinction matters because buyers are fundamentally purchasing future cash flows. With recurring revenue, those cash flows are contractually secured. With reoccurring revenue, they must be estimated based on behavioural patterns that could change. The risk profile is different, and the valuation reflects that difference.
The Valuation Impact
The valuation difference between recurring and reoccurring revenue is substantial. According to SaaS Capital analysis, bootstrapped SaaS companies with true recurring revenue trade at approximately 4.8x ARR, while equity-backed companies achieve approximately 5.3x. Public SaaS companies have stabilised in the 6 to 7x range.
But these multiples apply to businesses with verified recurring revenue. Companies with reoccurring revenue, even if highly predictable, typically trade at discounts to these benchmarks. Buyers apply haircuts to revenue that is not contractually committed, recognising the higher risk that historical patterns may not continue.
The gap widens further when you consider how revenue quality affects buyer perception. McKinsey research found that companies in the top quartile of valuation multiples achieved a median enterprise-value-to-revenue multiple of 24x, compared with 5x for their bottom-quartile peers. While multiple factors drive this gap, revenue quality and retention are central.
Net Revenue Retention: The True Test
Net revenue retention measures how much revenue from existing customers grows or shrinks over time, excluding new customer acquisition. It is the clearest signal of whether revenue is truly recurring, meaning whether customers stay and expand, or merely reoccurring, meaning they may or may not return.
McKinsey data shows that top-quartile-valued B2B SaaS companies achieve NRR rates of 113 per cent. These businesses grow 13 per cent annually just from existing customers, without acquiring any new business. Their bottom-quartile peers only reached NRR of 98 per cent, meaning they shrink slightly each year before new sales.
SaaS Capital benchmarking confirms that median NRR sits at 104 per cent, with the 90th percentile reaching 118 per cent. Companies above these thresholds demonstrate the stickiness that justifies premium multiples. Those below face harder questions about revenue quality.
For founders with reoccurring revenue models, demonstrating strong NRR is the path to higher valuations. If historical data shows that customers consistently return and increase their spending, buyers may credit that predictability even without contractual commitment. Without that evidence, discounts will apply.
How Buyers Classify Your Revenue
During due diligence, buyers examine revenue composition in detail. They review contract terms, payment histories, customer cohort retention, and expansion patterns. They are looking to answer a simple question: how confident can we be that this revenue will continue?
Contracts receive the closest scrutiny. Buyers examine length of commitment, cancellation terms, pricing escalators, and auto-renewal provisions. A three-year contract with automatic renewal and no penalty cancellation is not the same as a month-to-month agreement, even if both customers have been paying for years. Buyers also examine contract enforceability, payment terms, and whether customers have historically honoured their commitments or sought early termination.
Revenue recognition also matters. Buyers want to understand how revenue is earned and when it can be recognised. Deferred revenue provides visibility into committed future revenue. Long collection cycles or high refund rates suggest revenue quality issues. Buyers will often reclassify revenue that appears recurring but has characteristics that suggest otherwise, such as high early termination rates or significant discounting to retain customers.
Customer concentration affects classification. Revenue from a single large customer, even if contractually committed, carries key customer risk. Buyers may discount this revenue more heavily or require protection through earnouts or escrows tied to that customer's retention.
The timing of revenue also matters. Revenue that arrives predictably each month signals operational maturity. Revenue that arrives in lumps, even if it ultimately totals to similar annual amounts, suggests less control and predictability. Buyers model cash flows carefully, and lumpiness creates forecasting difficulty that translates to valuation discount.
Improving Your Revenue Quality Before Sale
Founders who anticipate an exit within 12 to 24 months should evaluate opportunities to strengthen their revenue classification. Several strategies can shift revenue from reoccurring to recurring.
Contract conversion is the most direct approach. If customers currently purchase on a transactional basis, can you offer subscription or annual commitments with pricing incentives? Even modest discounts for annual commitments can shift revenue classification while improving cash flow through upfront payment.
Term extension adds value. Moving customers from monthly to annual contracts, or from annual to multi-year agreements, demonstrates stickiness and reduces churn risk. The longer the remaining contract term at exit, the more confident buyers can be about future revenue.
Auto-renewal provisions strengthen classification. Contracts that automatically renew without active customer intervention are more valuable than those requiring explicit renewal. The friction of cancellation, even if minimal, improves retention probability.
Usage floors with overage pricing can transform purely usage-based revenue into a recurring base with variable upside. Customers commit to a minimum monthly amount, providing floor revenue, while usage above that threshold generates additional revenue.
Reducing churn is perhaps the highest-leverage activity. Every percentage point improvement in retention compounds over time and directly improves NRR. Investing in customer success, improving onboarding, and addressing common cancellation triggers all contribute to retention improvement that buyers will reward.
Expansion revenue also matters. If existing customers are increasing their spend over time through upsells, cross-sells, or usage growth, that pattern demonstrates the value your product creates. Buyers view expansion revenue as the strongest evidence that your product is genuinely embedded in customer workflows.
Presenting Your Revenue Story
How you present revenue affects how buyers perceive it. Founders should prepare detailed revenue segmentation that highlights quality, supported by cohort analysis demonstrating retention patterns.
Segment revenue by contract type, showing the proportion that is contractually committed versus transactional. For transactional revenue, provide historical retention data that demonstrates predictability even without contracts.
Calculate and present NRR clearly. Show trends over multiple years, demonstrate improvement, and benchmark against industry standards. Buyers who see strong and improving NRR will credit predictability that pure revenue classification might not suggest.
Prepare cohort analysis showing how customer behaviour evolves over time. If customers who have been with you for three years renew at 95 per cent rates and expand their spending annually, that pattern supports premium treatment even for revenue without long-term contracts.
Address concentration proactively. If one customer represents significant revenue, explain the relationship depth, contract terms, and renewal history. Buyers will discover concentration during diligence; presenting it transparently upfront builds credibility.
The Revenue Quality Premium
The nearly 5x multiple gap between top-quartile and bottom-quartile companies demonstrates how much revenue quality matters. Founders who understand the distinction between recurring and reoccurring revenue, who strengthen their revenue profile before going to market, and who present their story effectively capture premiums that less prepared sellers miss.
Revenue quality is not just about labels. It is about demonstrating to buyers that the cash flows they are purchasing will persist and grow. The more confident they are in that persistence, the more they will pay for it.
The practical implications are significant. A company with $5 million in ARR and strong recurring characteristics might trade at 5x to 6x, yielding $25 million to $30 million in enterprise value. The same $5 million in reoccurring revenue might trade at 3x to 4x, yielding $15 million to $20 million. The $10 million difference represents the cost of not understanding how buyers classify revenue.
Founders who invest 12 to 24 months in revenue quality improvement before going to market often find that the investment pays for itself many times over. Converting customers to annual contracts, improving retention, and demonstrating expansion revenue all contribute to the recurring classification that commands premium multiples.
If you want to understand how buyers would classify your revenue and what you might do to improve your position before exit, we would be glad to discuss your specific situation.