We have automated our delivery model using custom technology, but financial buyers are still applying a low service-provider multiple to our earnings. How do we use a capitalization of earnings model to isolate our tech-enabled margins and defend a technology-level multiple?

Question

Tyler Smith · Accepted Answer

Financial buyers want to label you a service business because it justifies a lower multiple. To break out of this valuation trap, you must use a capitalization of earnings model that clearly separates your legacy human labor costs from your automated technology margins. Start by creating a pro forma financial model. This model must isolate the revenue and direct margins generated specifically by your automated workflows. Show the buyer how your technology allows you to scale revenue without a linear increase in headcount. This is the definition of software like leverage. Back this up with operational data. Use your weekly scorecard and history of Rocks to demonstrate how your systems have systematically reduced human error and sped up delivery times. If you can prove that your technology has increased your gross margins by twenty percentage points over the industry average, you have a strong case for a split multiple. Under this structure, your service revenue is valued at a standard multiple, but your technology enabled revenue commands a premium rate. This forces the buyer to pay for the efficiency and scalability you have built into the business.