We have a mix of project work and recurring software revenue. How do we prevent a buyer from applying a low service-company multiple to our whole business?

Question

Tyler Smith · Accepted Answer

If you mix your high margin recurring software revenue with your lower margin professional services in a single profit and loss statement, a buyer will lazy price your business. They will apply a low service company multiple to your entire consolidated EBITDA. To prevent this, you must segment your financials and operations.

Run a segment margin analysis that clearly isolates your recurring revenue from your project based work. Show the direct cost of delivery for each segment. Your recurring revenue should have its own gross margin profile, ideally above seventy percent, while your services division operates closer to forty percent. By separating these segments, you can argue for a sum of the parts valuation. This allows your investment banker to apply a high software multiple to the recurring stream and a standard service multiple to the remainder.

Operationally, you must show that these divisions are managed separately. Use your EOS® Accountability Chart to show distinct leaders for product delivery and professional services. If the same engineers are hopping between writing software and doing manual custom implementation work, the buyer will see it as a services business with a tech facade.

In your V/TO®, define these distinct revenue models and show how your recurring model scales independently of headcount. When you present a buyer with clean segment reporting and dedicated leadership, you force them to value your recurring revenue at its true worth.