If you are preparing an IT services business for sale, the most important number in your financial statements is not your turnover and it is not your EBITDA margin. It is the proportion of your revenue that is recurring and contracted.
This is not a nuance — it is the central variable that determines whether your business is valued at 3x EBITDA or 5x EBITDA.
What buyers are actually buying
When a buyer acquires an IT services business, they are buying a revenue stream. The question they are asking — often without articulating it this way — is: “How much of this revenue will still be there in 12 months if nothing changes?”
Project revenue has no answer to that question. Each piece of project revenue has to be re-won. Managed service contracts, SaaS subscriptions, and long-term support agreements have a clear answer: most of them will renew, because switching costs are high and churn in well-run MSPs is low.
The same business with 60% recurring revenue and 40% project revenue is worth materially more than the same business with those numbers reversed. The multiple applied to the recurring element will be higher. The overall EBITDA will look more defensible. Due diligence will be shorter because there is less uncertainty to price.
What “recurring revenue” actually means
Not all recurring revenue is equal. Buyers — and their lenders — will look at:
Contract length and notice periods. A rolling monthly contract is different from a three-year agreement. Both are better than project work, but the latter is substantially more valuable.
Churn rate. If you have 85% annual revenue retention, that is a story worth telling clearly. If you have 70%, that is something a buyer will model carefully.
Concentration. If 40% of your revenue comes from one client, that client’s contract is the acquisition. A concentrated revenue base requires different pricing than a diversified one.
Revenue per client. High revenue per client with a small number of clients is more risky than lower revenue spread across a larger base. Both can work, but they are different acquisition propositions.
What you can do about it now
If you are five years from an exit, the right time to start improving your recurring revenue ratio is now. The interventions are not complex:
Moving time-and-materials support to managed service contracts is the most direct lever. Clients who call you for ad hoc support are already dependent on you — the question is whether that dependency is formalised in a contract.
Introducing annual software or platform subscriptions for work you are currently doing on a project basis converts project revenue to recurring revenue. This requires a conversation about value and pricing, not technical work.
Multi-year agreements with modest annual increases cost you very little in practice and are worth significantly more to a buyer than rolling arrangements.
None of these changes require a new product or a new market. They are commercial and contractual changes to an existing revenue base.
Paul Carroll is CEO and CFO of Hoki Limited. Hoki acquires profitable, founder-led UK technology businesses. If you are thinking about the value of your business and what drives it, we are happy to talk.