Valuing Recurring Revenue Businesses

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February 04, 2025

by a searcher from Wilfrid Laurier University - School of Business and Economics in Woodbridge, Vaughan, ON, Canada

Hello everyone,

My background over the past 5 years has been primarily on acquiring manufacturing and industrial service businesses in Canada and the US for a family office. Now I am also looking at expanding our operations into more recurring revenue service businesses, generally with industrial/commercial/institutional customers.. Naturally these provide generally more consistent financial performance and thus less risk than project-based businesses, often better cash flows, margins, etc.

My question is: how to value them differently? I know some acquirers use MRR multiples instead of EBITDA, or perhaps value on DCF. Just curious to hear any thoughts

I'm not looking for a cut and dry answer here, since there isn't one and every situation can be different. But has anyone come across any resources that are helpful in valuing / structuring recurring revenue businesses?

Thanks in advance

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Reply by a searcher
in New York, NY, USA
Hello.

When you see "MRR" or "ARR" multiples, it generally refers to technology (software) businesses selling SaaS, or tech-enabled services businesses with 12-month contracts similar to SaaS deals.

For a non-technology business, the term you may see from investors is "re-occuring" rather than "recurring". For this, you are simply likely to see a higher EBITDA multiple than for an analogous business without the re-occuring revenue profile. (e.g. 8x EBITDA for a $2m EBITDA home services company rather than 5x. I am making the numbers up.)

I do not know your sector well enough to opine on specific multiples.

Thank you
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Reply by a searcher
from Harvard University in Charlotte, NC, USA
If the industry has large public players, you may get some good stimuli by looking at how those companies are valued (or how those companies have valued smaller acquisitions). Some spaces have a known market for buying a “book of business” on an MRR basis – in that case I’d value a target company using both MRR and DCF to get a potential range.
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