We have a mix of low-margin implementation services and high-margin recurring SaaS revenue, but the buyer is attempting to apply a single, blended low multiple to our entire company. How do we model and defend a sum-of-the-parts valuation to capture the true value of our business?

Question

Tyler Smith · Accepted Answer

Buyers will always try to simplify your business model to their advantage by applying a single, conservative multiple to your consolidated EBITDA. If your revenue mix includes both transactional implementation fees and recurring subscription revenue, a blended multiple will severely undervalue your highly predictable recurring income.

To defend your true worth, you must force the buyer to look at the business through a sum-of-the-parts valuation model.

First, segment your financial statements. You must clearly separate the revenue, cost of goods sold, and gross margins of your implementation services from your recurring software streams. If your books are currently lumped together, have your finance team clean this up immediately.

Second, apply appropriate market multiples to each segment. Your low-margin implementation services might command a three to four times EBITDA multiple, while your recurring software revenue should be valued at a much higher multiple of recurring revenue or segment EBITDA.

Third, prove the operational connection between the two segments. Show the buyer that your implementation services are a necessary customer acquisition tool that feeds your high-margin, recurring software engine.

Discuss this strategy with your leadership team and document it in your V/TO®. Use your weekly Level 10 Meeting™ to ensure your sales team is tracking and hitting their recurring revenue targets. By demonstrating that your business is not just a standard service firm but a highly efficient technology platform with a predictable recurring base, you can successfully reject a blended multiple and secure a premium valuation.