What Is Recurring Revenue? | Agency M&A Definition
Recurring revenue is predictable, ongoing income generated from client retainers, subscriptions, or long-term contracts that renew on a regular basis. In the agency context, it includes monthly retainers, annual service agreements, and managed-service fees — as opposed to one-time project revenue. Agencies with high proportions of recurring revenue are significantly more valuable in M&A transactions.
Recurring Revenue in Agency M&A
When selling a marketing agency, the split between recurring and project-based revenue is one of the first things a buyer will examine. An agency earning $3M in total revenue with $2.1M (70%) from monthly retainers tells a very different story than one with $3M where $2.4M comes from one-off website builds or campaign projects. Buyers value recurring revenue because it provides predictable cash flow, reduces the cost of client acquisition, and makes financial forecasting more reliable. For digital marketing agencies, common sources of recurring revenue include monthly SEO retainers, ongoing paid media management, content marketing subscriptions, and marketing-as-a-service contracts. Agencies preparing for sale should actively convert project clients to retainer relationships 18-24 months before going to market. Even shifting 10-15% of revenue from project to retainer can meaningfully improve the valuation. Buyers also differentiate between soft recurring revenue (month-to-month agreements) and hard recurring revenue (annual contracts with termination clauses), with the latter carrying more weight.
How Recurring Revenue Affects Agency Valuation
The proportion of recurring revenue is one of the strongest drivers of valuation multiples in agency M&A. Agencies with 70%+ recurring revenue routinely trade at 6-8x EBITDA, while project-heavy agencies with less than 30% recurring revenue often cap at 3-5x. The premium exists because recurring revenue reduces integration risk for the buyer — they can project future cash flows with greater confidence and borrow against them to finance the acquisition. The quality of recurring revenue matters too: a 24-month managed services contract with a Fortune 500 company is valued more highly than a month-to-month retainer with a small business that could cancel at any time.
Example
Two SEO agencies each generate $1.5M in revenue with $300K in EBITDA. Agency A earns 80% ($1.2M) from 12-month retainer contracts averaging $8,000/month per client. Agency B earns 35% ($525K) from retainers with the balance from one-time audits and consulting projects. Agency A sells at 7x EBITDA ($2.1M) while Agency B sells at 4.5x EBITDA ($1.35M) — a $750K difference driven almost entirely by the recurring revenue profile. Agency A’s buyer also secures better financing terms, needing only 40% cash at closing versus 60% for Agency B.
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