We are transitioning from a high margin project delivery model to a managed services subscription model, but our current EBITDA is temporarily depressed due to the upfront transition costs. How do we use the Income Approach under IVS 105 to convince a buyer to value us on our annualized recurring revenue run rate rather than historical EBITDA?

Question

Tyler Smith · Accepted Answer

Transitioning to a managed services subscription model creates massive long term enterprise value, but the near term transition costs often depress your current EBITDA. If a buyer values you solely on historical cash flow, they are buying your future growth at a deep discount.

To defend your valuation, you must use the Income Approach under IVS 105. This approach allows you to build a discounted cash flow model based on the highly predictable future cash inflows of your new contract base rather than relying strictly on the past.

When presenting this to buyers, segregate your historical development and migration costs. These are non recurring transition expenses that should be added back to your adjusted EBITDA.

Next, present clear operational metrics showing client retention, customer acquisition cost, and lifetime value.

Use your weekly Level 10 Meeting data to demonstrate that client onboarding and retention are governed by a repeatable system.

By combining the rigorous valuation methods of IVS 105 with operational proof of customer retention, you can force the buyer to base their valuation on your forward looking annualized run rate, capturing the true strategic value of your recurring revenue transition.