We run a hybrid business with both recurring maintenance contracts and one-time project fees. The buyer wants to apply a blended multiple that heavily discounts the project side. How do we structure the transaction to isolate and value these two streams accurately?

Question

Tyler Smith · Accepted Answer

Buyers love recurring revenue, but they will use any non-recurring stream as an excuse to drag down your overall multiple. Instead of accepting a low blended multiple on your entire business, you should advocate for a sum-of-the-parts valuation model. This means valuing your recurring and non-recurring revenue streams as two separate business units. To make this argument stick, you must clearly segregate your financial data. Present your Quality of Earnings data with separate margins for your recurring maintenance contracts and your one-time project fees. Show the buyer that your project services are not just random transactional sales, but actually serve as a highly predictable customer acquisition channel that feeds your high-margin recurring contracts. If the buyer still insists on discounting the project revenue, structure a bifurcated deal. Value the recurring revenue at your target premium multiple paid in cash at close. For the project revenue, structure a performance-based earnout or a seller note. This allows you to capture the full value of those one-time fees as they materialize post-close, rather than letting the buyer buy those cash flows at a steep discount today. It keeps the transaction moving forward without leaving money on the table.