Valuation with revenue from project and recurring?

November 16, 2024

by a searcher from New York University - Leonard N. Stern School of Business in Grand Rapids, MI, USA

If you have a business that does 40% recurring and 60% project, how do you think about the valuation?

What about the reverse, 60% recurring and 40% project?

Are you shifting valuation logic dramatically if $1m EBITDA vs $2m EBITDA?

Saw an MSP deal and was curious how other approach this. It's obviously more simple if majority of business is recurring revenue or project-based revenue.

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Reply by a searcher
from Northwestern University in Minneapolis, MN, USA

I believe most buyers simply apply a different multiple to each based on the revenue quality. I'd suggest looking pretty closely at the gross and net margins of those different types of revenue and also whether the recurring part is truly recurring or just re-occuring. Relevant posts: https://bigdealsmallbusiness.substack.com/p/quality-of-revenue###-###-#### and https://www.mostlymetrics.com/p/recurring-vs-reocurring-revenue-whats. Also, make sure to account for deferred revenue from the purchase price for any of the revenue that has been paid for upfront but for which you'll have to continue to deliver services on post-close.

Reply by a searcher
from Cornell University in Grand Rapids, MI, USA

There are more factors at play here that I'd encourage you to look into. How discretionary is the 60% project work? What does the customer concentration look like? How "sticky" are the customer relationships? These are just a few. In my opinion the###-###-#### vs###-###-#### is probably less of a value driver than the jump from 1-2M of EBITDA, although if you are highly concentrated, that would obviously affect value. At the end of the day, in any case it's probably a turn of value up or down. As a loose swag, I'd think###-###-#### vs###-###-#### is an extra half turn and 1 vs. 2M of SDE is an extra turn tops

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