Recurring Revenue Assessment Checklist: Evaluating Revenue Quality Before Buying a Business in Australia

Recurring Revenue Assessment Checklist

Use this checklist in the due diligence phase, ideally after you've received the information memorandum and initial financials but before you've committed to a price.

Mark each item as Complete, Partial, Not Applicable, or Red Flag.

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Phase 1: Revenue Mix Analysis

Objective: Classify all revenue by durability — contractual, repeat, or one-off. Establish what percentage is genuinely recurring.

• Request a revenue breakdown by customer for the last 3 years. Ask for it in a spreadsheet, not just a P&L summary. The data should show each customer, what they paid, and how often they transact.

• Classify each revenue stream into one of three categories:

  • Contractual recurring: written contract, defined scope, automatic renewal or defined notice period
  • Repeat business: consistent customer, no written contract, re-engaged each year or job by job
  • Project / one-off: no expectation of recurrence; won competitively each time

• Calculate the contractual recurring revenue percentage. What share of last year's total revenue was contractual? A trades business with 40%+ contractual recurring typically commands a 0.5–1.0x EBITDA premium over one with under 20%.

• Identify any revenue that appears recurring in the P&L but isn't. Annual projects, seasonal contracts that were re-quoted each time, and government tender work should be excluded from the recurring revenue figure even if they appeared every year.

• Ask the seller to define what they mean by recurring revenue. Get it in writing. The answer tells you a lot about their level of self-awareness (or optimism).

• Map revenue by season. For trades businesses in particular, consistent quarterly revenue is more valuable than revenue that spikes in two months and disappears for four.

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Phase 2: Contract Quality Assessment

Objective: Determine whether existing contracts are enforceable, transferable, and durable beyond a change of ownership.

• Obtain copies of all written service contracts. Read the actual documents, not a summary. Look specifically for:

  • Assignment clauses (can the contract transfer to a new owner?)
  • Termination for convenience clauses (can the client walk with 30 days notice?)
  • Key-person clauses (any that tie performance or continuation to the current owner?)
  • Automatic renewal vs manual renewal requirement

• Check whether contracts are in the business name or the owner's personal name. Contracts signed by the owner personally are a material risk. They may not transfer automatically on business sale. Your lawyer needs to review these specifically.

• Identify contracts with government or local council clients. These often have supplier registration requirements, insurance minimums, and procurement rules that may require re-qualification under a new owner. Confirm with the relevant council or agency before settlement.

• Check the expiry dates of all existing contracts. How many expire within 12 months of your expected settlement date? Contracts due for renewal shortly after you take over need to be factored into your assessment.

• Identify the price escalation terms. Can you increase prices at renewal? Are increases capped to CPI? An old contract locked to 2019 pricing may look like good revenue but it's eroding in real terms.

• For verbal arrangements, ask the seller to explain how they're maintained. Who calls whom? How often? Is there any written record (email threads, invoices, job histories) that demonstrates continuity? The more formal the paper trail, the more transferable the relationship.

• Ask for the three most recently renewed contracts. If the seller struggles to produce them, the "contracts" may be less formal than claimed.

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Phase 3: Customer Retention Verification

Objective: Get independent confirmation — from actual clients — that the recurring revenue relationship will survive a change of ownership.

• Request reference calls with the top 5 revenue-contributing customers. Most sellers will agree to this as a condition precedent. If they refuse, that's a red flag.

• In each reference call, ask directly:

  • "Is your relationship with the business written or informal?"
  • "How would you feel about a change of ownership?"
  • "What would make you reconsider the arrangement?"
  • "Is there anything specific about [owner's name] that makes this work?"

  Listen for hesitation. Listen for "as long as [owner] is involved." Listen for "we'd have to talk about it."

• Verify average customer tenure. Ask for a list of recurring clients with their start date. An average tenure of 5+ years in a trades service business is genuinely positive. An average of 18 months for a business the owner claims has "strong repeat custom" is a discrepancy worth probing.

• Check for any clients the seller hasn't mentioned. Cross-reference the customer list against the BAS lodgements (GST collected by customer) for the last 2–3 years. If you see large or regular transactions from clients not on the "recurring" list, ask why.

• Ask if any recurring clients have given notice or reduced spend in the 12 months before the sale. Any churned contracts in the pre-sale period should be disclosed — and if they're not, it's likely to come out in financial verification anyway.

• Assess geographic concentration. A maintenance contract client base spread across 60 sites in metro Melbourne is very different from 60 sites on one commercial estate where a single property manager makes all the decisions. The latter is functionally one client relationship, not 60.

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Phase 4: Financial Cross-Check

Objective: Verify claimed recurring revenue against independent financial records. Numbers on a spreadsheet need to tie to money actually received.

• Reconcile the claimed recurring revenue figure against bank statements. For each major recurring client, can you trace the payments to actual deposits? Monthly maintenance fees should show up as consistent, regular bank deposits. If they don't — if the "recurring" revenue comes in lumpy or irregular — probe why.

• Cross-check against BAS lodgements. GST collected by quarter should be broadly consistent with claimed quarterly recurring revenue. A significant discrepancy between BAS lodgements and the claimed recurring revenue figure is a material red flag.

• Request invoices for the top 10 recurring clients for the last 2 years. Invoices should match what's in the accounting system, which should match what's in the bank. Any gaps in this chain need an explanation.

• Check for revenue recognition timing issues. Some businesses invoice for 12-month contracts upfront and recognise it all in one period. The revenue exists, but it inflates one year at the expense of the next. Make sure you understand how recurring contract revenue is recognised in the accounts you're relying on for valuation.

• Calculate the renewal rate for the last 3 years. Of the contracts that were up for renewal in each of the last 3 years, what percentage renewed? A 90%+ renewal rate over 3 years is solid. Below 80% is worth understanding in detail.

• Check whether the recurring revenue grew, held flat, or declined over the 3-year period. A business claiming strong recurring revenue that's actually declining year-on-year needs a clear explanation — did the owner intentionally reduce it? Did clients leave? Did pricing erode?

• Assess what it costs to maintain the recurring revenue. Some businesses have recurring revenue that looks great but is sustained by ongoing promotional pricing, constant attention from the owner, or below-market service fees that a new owner couldn't sustain. Understand the true margin on the recurring revenue, not just the top line.

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Scoring Guide

After completing the checklist, score your assessment:

Phase	Max Points	Your Score
Revenue Mix Analysis	25
Contract Quality	30
Customer Retention	25
Financial Cross-Check	20
Total	100

Scoring:

• 80–100: Strong recurring revenue. Proceed with confidence. May support premium multiple.
• 60–79: Reasonable recurring revenue with some risk. Structure an earn-out or retention clause to protect downside.
• 40–59: Recurring revenue is largely repeat business, not contractual. Adjust your valuation multiple accordingly.
• Below 40: Minimal durable recurring revenue. Price this as a project business, not a recurring revenue business.

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Red Flags That Warrant Renegotiation or Walk-Away

Any of the following should trigger a pricing conversation or, depending on severity, reconsideration of the deal:

• More than 30% of claimed recurring revenue has no written contract
• Key-person clauses in major contracts that require the seller to remain involved
• Average customer tenure under 2 years despite "recurring revenue" claims
• Renewal rate below 75% in any of the last 3 years
• Recurring revenue declined in both of the last 2 years
• Seller refuses reference calls with more than 2 top clients
• Claimed recurring revenue doesn't reconcile with BAS lodgements

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This checklist is a due diligence tool, not legal or financial advice. For complex transactions, work with a solicitor experienced in business acquisitions and an accountant who can verify the financial claims independently.

Want the full acquisition framework? See Module 2 of the Playbook — Finding Profitable Businesses.