When I evaluate a business for acquisition, I don’t just focus on revenue or cash inflows; I pay just as much attention to recurring expenses. These are the costs that repeat month after month and quietly shape the company’s true profitability.

Early in my career, I underestimated how much recurring expenses matter. I looked at topline sales and net profit, but I didn’t always dig into which expenses were recurring and which were one-time. That mistake led me to overestimate profitability, and in one case, I had to inject cash after closing just to keep the business running.

Over time, I’ve learned that recurring expenses are the heartbeat of a business. They determine how much flexibility I have, how stable profits really are, and whether the company can withstand unexpected challenges.

Why Recurring Expenses Matter

Recurring expenses matter because they don’t go away. Whether revenue is strong or weak, the business still has to cover rent, payroll, utilities, insurance, and other fixed costs.

These expenses affect:

• Profitability: True profit is revenue minus recurring costs.
• Cash flow stability: If recurring expenses are too high, even strong revenue may not be enough.
• Valuation: Buyers like me pay more for companies with lean, well-managed recurring expenses.
• Resilience: Businesses with manageable expenses survive downturns better.

I’ve learned that recurring expenses are just as important as recurring revenue when it comes to long-term health.

My Early Mistakes

In one deal, I overlooked how high payroll was compared to revenue. Employees were critical, but the company carried too much administrative overhead. Even with decent sales, profitability was razor thin.

In another acquisition, I underestimated technology costs. Subscriptions, software, and licensing fees looked minor individually but added up to a large recurring burden. Those expenses ate into margins more than I realized.

Both experiences taught me to examine recurring expenses with precision.

The Framework I Use to Evaluate Recurring Expenses

When I study a business, I break down recurring expenses into categories and test each one for efficiency and necessity.

1. Payroll and Benefits
This is often the largest recurring expense. I ask: Are headcount and compensation aligned with revenue? Are benefits competitive but sustainable?

2. Rent and Facilities
I study lease terms carefully. Long leases at above-market rates can trap a business. Flexible leases or ownership of property are stronger.

3. Utilities and Services
These are smaller line items but still recurring. I look at whether costs are being monitored or allowed to creep upward unnoticed.

4. Insurance
Coverage is necessary, but I ask whether policies are competitively priced. Insurance is a recurring cost that can often be renegotiated.

5. Technology and Subscriptions
Software-as-a-service costs add up quickly. I review whether subscriptions are actually being used or if redundant tools can be eliminated.

6. Debt Service
If loans exist, I treat debt service as a recurring expense. It affects cash flow predictability.

7. Vendor Contracts
Some vendor agreements lock the company into recurring spend. I evaluate whether terms are favorable or if renegotiation is possible.

Questions I Ask About Recurring Expenses

To test profitability, I ask:

• Which expenses recur monthly without fail?
• Which expenses are fixed vs. variable?
• How much of the revenue is consumed by recurring obligations?
• Could any recurring expenses be reduced or eliminated post-acquisition?
• Are any one-time expenses being disguised as recurring (or vice versa)?

These questions reveal the true cost structure.

Why Recurring Expenses Impact Valuation

A company may show strong revenue, but if recurring expenses are bloated, profits are fragile. Buyers like me discount valuation when expenses are inefficient. Conversely, lean companies with streamlined recurring costs often command higher multiples.

Recurring expenses also affect financing. Lenders look closely at whether cash flow after expenses is sufficient to cover debt.

Mistakes I’ve Made Ignoring Expense Quality

I’ve made the mistake of assuming profitability could easily be improved post-acquisition by “cutting fat.” In reality, some recurring expenses were deeply tied to customer satisfaction. Cutting them would have damaged the business.

That mistake taught me that I can’t just slash costs, I have to understand their role in the business model.

How I Strengthen Expense Management Post-Acquisition

After buying a business, I don’t make drastic cuts immediately. Instead, I:

• Audit recurring expenses in the first 90 days.
• Eliminate duplicate or unused subscriptions.
• Renegotiate vendor contracts where possible.
• Benchmark payroll and benefits against industry norms.
• Create a monitoring system to track expenses monthly.

This balanced approach improves profitability without disrupting operations.

Why Owners Often Ignore Recurring Expenses

Many small business owners grow accustomed to their expenses over time. They stop questioning whether certain subscriptions or services are necessary. In some cases, they even treat personal expenses as recurring business costs.

That complacency creates opportunity for buyers like me to tighten systems and improve margins.

Final Thoughts

Recurring expenses are one of the most important parts of evaluating profitability. They reveal the true cost of operating the business and determine whether revenue translates into lasting cash flow.

I’ve learned to study payroll, rent, utilities, insurance, technology, debt service, and vendor contracts carefully before committing to a deal. By doing so, I avoid surprises, protect profitability, and often uncover opportunities for improvement.

Because at the end of the day, profitability isn’t just about revenue, it’s about how much money is left after covering the bills that never go away.

I continue sharing my acquisition frameworks, strategies, and lessons at DrConnorRobertson.com, where I document the real playbook I’ve built deal by deal.