Trajectory Matters: Making EBITDA Arbitrage Work in IT Services

EBITDA multiple arbitrage gets tossed around a lot. In plain English: buy smaller, healthy firms at lower EBITDA multiples, integrate them into a stronger platform, grow revenue and profit faster, and—because the combined company deserves a higher multiple—capture the spread. As Mike put it, “Trajectory matters. Velocity matters—for both revenue and profit.”

What “EBITDA multiple arbitrage” really means

Definition (plain English):
EBITDA multiple arbitrage is the value created when you buy a smaller, healthy firm at a lower EBITDA multiple, integrate it into a stronger platform, and the same EBITDA is subsequently valued at a higher multiple because the combined company is larger, more diversified, and better run.

Why the re-rating happens (the market pays for):

• Scale & diversification: lower concentration risk and more durable earnings
• Capability & maturity: broader offers, stronger delivery/process, cleaner data
• Momentum: faster, more repeatable revenue and profit growth (velocity)
• Governance & quality: better controls, reporting, and investor-grade ops

The simple math:
If a tuck-in generates E of EBITDA at m₁× and, post-integration, that same EBITDA is valued at m₂× (with m₂ > m₁), then the arbitrage spread (before synergies) is:
Spread ≈ (m₂ − m₁) × E
Add operational synergies (margin lift/cost takeout) and incremental growth, and the lift compounds.

What it is not:

• Not “financial engineering” alone—integration creates the conditions for the higher multiple.
• Not guaranteed—without cultural/strategic/financial fit and execution, the market won’t pay up.

Operator takeaway:
Arbitrage is earned by reducing risk and increasing quality of earnings fast. Size helps, but trajectory matters more—the market rewards platforms that integrate cleanly and accelerate EBITDA

We say it all the time… those three fits anchor whether a roll-in actually earns the platform multiple. And if you haven’t heard us talk about it, here’s a quick breakdown:

Cultural fit (how we work)

What to verify

• Decision cadence (weekly/quarterly rhythm, who decides what)
• Leadership style & values (client-first? data-first?)
• Org design (player/coach managers, player-heavy IC model, or layered?)
• Communication norms (written vs. meetings, escalation paths)
• Compensation philosophy (base/bonus mix, sales comp mechanics)
• Client experience standards (SLAs, QA, “definition of done”)
• Office Environment (Remote, Hybrid, In-Person)

Red flags

• “We’ll fix culture later.”

Strategic fit (where we win)

What to verify

• Vertical overlap & similar business objectives (who we sell to, why we win)
• Offer map & adjacency (what cross-sells naturally)
• Tech stack/vendor alignment (platforms, certifications, marketplaces, incentives)
• Geographic coverage and delivery model (onshore/nearshore/offshore)
• Moat levers (IP, playbooks, data, partnerships, reputation)
• 1 + 1 = 3 (Can you get somewhere together you can’t alone?)

Green flags

• Clear adjacency paths (e.g., Managed Cloud → DevOps → Data
• Complementary certifications/partnership tiers that unlock rebates/MDF
• Pipeline evidence of cross-sell potential (not just a slide)

Red flags

• “Build it and they will come” product aspirations without a clear plan

Financial fit (does the math work)

What to verify

• Accretion: target EBITDA margin vs. platform margin (post-synergy)
• Gross margin quality by line of business (services, resale, managed)
• Utilization & bill rate parity (can we harmonize without margin loss?)
• Working capital profile
• Revenue mix & durability (recurring %, churn/retention)
• Concentration risk (top client <20%, top 5 <50%)

Red flags

• Heavy reseller mix with rebate risk or one-time project spikes
• Integration costs unfunded

Why platforms earn higher multiples (and small firms don’t)

Smaller firms typically trade at lower EBITDA multiples due to concentration risk, lighter process maturity, and limited capability breadth. When you plug a strong tuck-in into a platform that’s already solved those gaps, shared go-to-market, delivery discipline, financial controls, the same EBITDA can be worth more.

The win isn’t “bigger for bigger’s sake.” It’s capability + maturity + momentum:

• Capability: moving up the value chain (not just more bodies).
• Maturity: repeatable offers, pricing guardrails, delivery OS.
• Momentum: pipeline health and operating cadence that keep velocity high.

Rolling equity & the second bite (seller view)

For a seller, rolling equity is how you participate in the arbitrage. Trade a portion of cash at close for platform stock and a path to the second bite. The upside is real when:

• the platform has a credible integration plan,
• growth capital isn’t constrained by covenants, and
• governance aligns incentives (no “dilution drift”).

Integration is the value driver (where 1 + 1 = 3)

The team called this out repeatedly: arbitrage only shows up after integration. The practical moves:

• One commercial engine: unified ICP, offers, pricing, and pipeline discipline.
• Delivery operating system: shared tools, QA, SLAs, and resourcing.
• Back-office consolidation: finance, HR, legal, and IT standardized early.
• Cross-sell motion: lead with problems solved, not org charts.

Do these quickly and cleanly and you earn the right to that higher multiple. Drag your feet and the spread evaporates.

Where arbitrage stalls (red flags we see)

• Aggregation without integration. Headcount up, chaos unchanged.
• Capability gaps. Logos added; leverage missing.
• Underfunded plan. Working capital thin or debt service crowding growth.
• Concentration risk. One “hero client” depresses the platform multiple.
• Leadership thrash. No clear decision cadence, no momentum.

Questions every seller should ask before joining a roll-up

These came straight from the discussion and our day-to-day work with founders:

1. What multiple does the platform reasonably command today, and why?

2. What are the first three integration moves post-close, and who owns them?

3. How will my team be measured and compensated in the new model?

4. What’s the plan to accelerate velocity (revenue and EBITDA) in the first 12 months?

5. How much dilution should I expect over 12–24 months and what triggers it?

6. What’s the next exit horizon, and who are the logical buyers?

We have a white paper all about the common questions (and questions you may not even think of) you’ll need answers to when going down the road of selling your tech-services business. Learn more >> 

The spread only shows up when execution does. Our team has led hundreds of IT services transactions and integrations. If you’re weighing a roll-in, building a roll-up, or just want a sanity check on the math, let’s talk.