Published January 10, 2019 | Updated June 12, 2019
Service contracts that generate monthly recurring revenues are important contributors to your long-term profitability. But many dealers prefer not to build service agreements into leases.
On the surface, this might not seem like much to talk about. Bundled service or not – what’s the difference?
Here’s the issue:
Not bundling service with leases may result in inadvertently reducing the value of your company. And that’s definitely worth talking about.
The Valuation Effect
Monthly recurring revenues (MRRs) greatly enhance the value of a company. By bundling the lease and service, you can show the value of the contract (and in some cases the value of the customer relationship) as future revenue.
With a standard service contract, you can show only the value of the time remaining until contract renewal. The difference can amount to a recognition of future revenues that is two to three times higher when you bundle the lease and service – making your company appear more attractive and valuable to banks and potential acquirors.
The Relationship Effect
Too often you might see your sales team spinning their wheels pushing for a 24-month upgrade cycle with clients who are taking a transactional view of their imaging needs. Building the service contract into the lease puts the client on a predictable upgrade plan, freeing up the sales team to focus on other growth areas and potentially extending the replacement cycle, which can benefit your service revenues.
And when you build the service into the lease, it becomes harder for competitors to upgrade the account. They may have to build the remaining service into the cost of the upgrade, making it a much harder sell.
The Cash Flow Effect
There is no replacement for predictable monthly revenue streams. MRRs help you more effectively manage day-to-day cash flow requirements. MMRs are also a scalable way to grow your organization, one that allows for easier financial decisions about when to hire, expand, or make new investments in your business.
One word of caution as you build a stream of enhanced revenues by bundling service into leases: always escalate. Your costs will go up over the five-year term of an agreement. An agreement that is moderately profitable in the first year could be operating at an unacceptable margin level or even a loss by the fifth year if you don’t build an escalator into your agreements.
Bundling service into leases builds asset value and enhances productivity. And having a customer finance program provider that sees the business as more than a bunch of transactions can help you build an approach that maximizes the value of your company. That’s what we do at LEAF every day.