21 Jan Valuation Drivers: What Buyers Really Pay For in IT Services M&A
Every IT services founder wants to know what their business is worth. But valuation isn’t a number you look up. It’s a conclusion a buyer reaches after stress-testing everything you’ve built. In this post, we break down the real drivers behind how buyers underwrite IT services businesses, why multiples tell only part of the story, and what you can do right now to protect, and maximize, your enterprise value when it’s time to transact.
The first mistake: treating “valuation” and “multiple” like they’re the same thing
If you’ve spent any time around M&A, you’ve probably heard the same question asked a dozen different ways:
“What multiple are IT services companies selling for right now?”
It’s a fair question, but it can be misleading… let’s define a few basics first.
Valuation: The valuation of a business is the process of determining the worth of a business, looking at profit and evaluating all aspects of the business. The truest meaningful metric of a valuation is having a willing buyer and a willing seller coming to an agreement on a purchase price.
In the 3rd installment in our Sell-Side Master Class Podcast Series, Mike (Revenue Rocket’s CEO/founder) explains why founders get tripped up here: people confuse “a multiple of profit or EBITDA” with valuation and they’re not the same thing. A multiple is a way to benchmark an approximate value or range of values (often using a multiple of EBITDA), but it’s not valuation.
And for clarity, Mike defines EBITDA as earnings before interest, taxes, depreciation, and amortization. It’s also common to see Adjusted EBITDA (you’ll see why clean EBITDA matters below)
Buyers price future performance (certainty is the real driver)
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Here’s the core message from our Valuation Drivers podcast: buyers price future performance, not just the story told by historical financials. They’re trying to get comfortable with the certainty of future cash flows because that’s how they earn a return on investment.
At Revenue Rocket, we see valuation range and deal structure vary by the type of IT services business. Buyers underwrite different risk profiles depending on the model. But the foundation is consistent: buyers price future performance, and predictability in future cash flows is what drives confidence (and value).
Preparation impacts valuation and deal velocity
The Sell-Side Master Class Episode 2 Get Your House in Order, ties directly into this: Mike introduces the idea of deal “vibrancy,” meaning the cadence and pace of how a deal moves. He explains that pace often comes down to how quickly the seller can provide accurate information to the buyer. Preparing early means you’ve cleaned your data (customer lists, contracts, financials, systems) so you can react quickly in diligence and avoid surprises.
And the Revenue Rocket line that connects this back to value leakage is consistent across the series:
“Time kills all deals.”
The valuation drivers (and what to do about them)
Driver 1: Revenue quality (how predictable is your revenue?)
In our podcast on Valuation Drivers, the team sets the baseline and then explains how firms earn a premium (or get discounted) based on attributes tied to predictability, starting with revenue.
Recurring/contracted revenue
Recurring revenue is a major value driver in IT services, especially when firms have yearly or multi-year contracts with clear renewal periods. Predictability is key.
Buyers validate predictability by digging into contract quality and retention signals: contracts that are transferable (with minimal consent hurdles), clear renewal and termination terms, and retention data like average client tenure, reasons for termination, and customer satisfaction measures.
Concentration
Customer concentration can sometimes trigger a discount. If a large portion of revenue sits with one customer (or a small subset), the risk of losing that revenue is real and buyers will price that risk in.
Specialization (commodity vs trusted advisor)
The team also connects specialization to premium outcomes. When you’re viewed as a trusted advisor (harder to replace) rather than a commodity, retention and growth tend to follow—and that predictable line of growth is a premium signal.
Driver 2: Profitability quality (adjusted EBITDA and “clean” add-backs)
When buyers build their valuation model, it comes down to confidence. As Mike puts it, “the predictability of the cash flow drives the model.” The more consistent and durable your profitability is, the easier it is for a buyer to underwrite the business because it signals disciplined operations and the ability to keep scaling and reinvesting without volatility.
Sell-Side Master Class Episode 2 (Get Your House in Order) adds a simple “test” that fits perfectly into this blog:
The best way to check an add-back is to ask: “Is this expense going to continue once the business has been sold?”
- If yes, it’s likely not an add-back.
- If no, it may be an add-back, but it still needs to be clean and defensible.
Mike also warns against stretching the concept, like trying to add back costs from “mistakes” (sales hires or marketing programs that didn’t work). Those are often investments that continue in the business in some form and generally don’t get “credit” as add-backs. Check out our podcast episode all about Clean EBITDA and add-backs >>
“Clean” financials usually mean a few things:
- A clear P&L with appropriate, defensible add-backs and transparency around any owner-benefit items
- Clarity on cash vs. accrual, with many transaction-ready firms operating on accrual accounting
- A strong understanding of revenue mix (recurring vs. one-time/repeat, reseller revenue, and deferred revenue considerations)
- Consistency month-to-month over years (not months) so a buyer can underwrite performance with confidence
Driver 3: Operational and people readiness
Operational readiness can protect valuation because it reduces uncertainty.
Founder dependency is a common valuation problem, particularly for financial buyers who want to scale the business and reduce day-to-day dependence on the founder. The solution is deliberate: build the team and operating model so the business can scale and grow without being entirely tied to one person.
The valuation killers (where deals get discounted or derailed)
Some issues not only lower value, they introduce doubt.
Messy bookkeeping
If a buyer can’t make good sense of your books, they can’t forecast future cash flows with confidence. That uncertainty can lead to a materially discounted offer or a buyer walking away.
Messy contracting and record keeping
Inconsistent contracting and poor record keeping, aged contracts, inconsistent terms, and unclear transferability can also create preventable friction and risk during diligence.
Inconsistency in reporting and readiness for QoE
Being ready for scrutiny matters. Mike notes in the Valuation Drivers podcast that some firms prepare a quality of earnings analysis ahead of time to speed the acquisition process, especially if there are concerns around accounting validity.
Protecting enterprise value through diligence (and avoiding the retrade)
Once diligence starts, sellers can lose leverage if their numbers and records aren’t defensible.
In the Sell-Side Master Class series, Mike emphasizes the importance of doing the pre-work and stress-testing financials so you can defend EBITDA because deals can derail (or get repriced) when buyers start picking the financials apart.
Timing and team: don’t wait until LOI to “get ready”
Two consistent realities show up across this series:
- It takes a village to get a deal done! Advisors with deep expertise across legal, tax, and M&A matter if you want to avoid deal-breakers and value leakage.
- Start early. It’s reasonable to be thinking 6 – 12 months ahead of time. If you wait until LOI, the clock is already ticking, and delays create risk.
And again: time kills all deals.
If you want to protect valuation (and keep momentum strong), the playbook across our resources & experience is consistent:
- clean financials and defensible add-backs,
- contract and data hygiene,
- leadership depth that reduces founder dependency, and
- preparation early enough that diligence doesn’t turn into scramble mode.
If you are looking to get your firm ready for a sale, we’d love to be your partner. We are M&A people! Contact us for a no-obligation introduction call >>