Yale Case. By: Daniel Lazier / Jacob Thomas / A. J. Wasserstein
Recurring revenue is often regarded as the ultimate target in the ETA community. Investors, academics, and entrepreneurs routinely emphasize its importance, and many funds openly declare they will only back companies with strong recurring revenue streams. The central question of this Yale case study is whether this widespread belief actually translates into superior financial outcomes for SF acquisitions.
The authors analyzed a proprietary dataset of 59 traditional SF acquisitions that had reached full cycle (acquisition through to exit). Each company was categorized into four groups based on recurring revenue at the time of purchase:
- None (0%)
- Low (1–49%)
- Moderate (50–79%)
- High (80–100%)
For each case, MOIC and IRR were measured at exit, alongside the entry EBITDA multiple paid. A range of statistical analyses (histograms, regressions, correlation tests, Mood’s median test, and t-tests) were performed to assess whether recurring revenue levels predicted financial outcomes.
Main findings:
- No meaningful relationship: Across all tests, the study found no statistically significant correlation between the percentage of recurring revenue at acquisition and MOIC or IRR. High recurring revenue businesses did not consistently deliver stronger returns.
- Greater cost of entry: The one significant relationship observed was that companies with higher recurring revenue commanded higher EBITDA acquisition multiples. Entrepreneurs paid more upfront for these businesses, which likely eroded potential returns.
- Moderate recurring revenue as a “sweet spot”? In some analyses, companies with 50–80% recurring revenue appeared to deliver solid results. However, these findings lacked statistical robustness and could be due to noise in the data.
- Randomness and outliers: Outcomes varied widely across all bins, including companies with no recurring revenue that delivered strong returns, and some high recurring revenue firms that underperformed.
Interpretation and limitations:
- The dataset comes from a single experienced investor, avoiding double-counting but raising concerns of sampling bias.
- Other explanatory variables (industry, CEO background, acquisition vintage) were not included, meaning omitted variable bias could affect results.
- With only 59 observations, results are directional rather than conclusive. More data might confirm, refine, or contradict these findings.
Why recurring revenue still matters:
Even if it does not guarantee higher MOICs or IRRs, recurring revenue can remain strategically valuable:
- Operational stability for new CEOs: predictable cash flows reduce early pressure and allow inexperienced leaders to adapt more smoothly.
- Investor appeal: many ETA investors strongly prefer recurring revenue, making deals easier to finance.
- Potential for value creation: increasing recurring revenue during ownership (e.g., shifting from transactional to subscription models) can lead to higher exit multiples.
This study challenges a central tenet of ETA wisdom: recurring revenue alone does not reliably drive superior financial outcomes. Entrepreneurs should be cautious not to overpay for this attribute, as higher entry multiples can cancel out its benefits. Still, recurring revenue retains practical advantages, operational comfort, investor demand, and valuation upside if increased during ownership. The broader implication is that ETA entrepreneurs may want to relax their strict focus on recurring revenue and consider a wider pool of acquisition opportunities without sacrificing the potential for strong financial performance.
Read the full case in: https://som.yale.edu/sites/default/files/2025-09/Does%20Recurring%20Revenue%20Really%20Drive%20Financial%20Outcomes%20in%20Search%20FundAcquired%20Businesses.pdf
