Project-based revenue trades at half the multiples of recurring revenue. Technical expertise dependency destroys value when buyers can't replicate your team's capabilities. Build recurring revenue models and document technical knowledge to create transferable value.
IT Services • Managed Services • Software Development • Systems Integration • Technical Consulting
Technology service businesses face a valuation problem that other industries don't: project-based revenue trades at dramatically lower multiples than recurring revenue. Same industry. Same type of work. Different revenue model. Two to three times difference in valuation.
An IT services firm doing $3 million in project-based revenue with $900,000 EBITDA typically trades at 2.5 to 3.5 times EBITDA. That's $2.25 million to $3.15 million in enterprise value. The same firm with $3 million in recurring managed services revenue and $900,000 EBITDA trades at 4 to 6 times EBITDA. That's $3.6 million to $5.4 million in value. Same EBITDA, different revenue model, $1.35 million to $2.25 million more value.
Why do buyers pay higher multiples for recurring revenue? Because project revenue is risky and requires constant sales effort to maintain. You finish one project, you have to sell the next one. Revenue is lumpy. Customer relationships are transactional. If sales slow down, revenue drops immediately. Buyers see this risk and discount accordingly.
Recurring revenue is predictable. Managed services contracts renew monthly or annually. You know what revenue looks like next month and next quarter. Customer relationships are ongoing, not transactional. If sales slow down, existing revenue continues while you fix the pipeline. Buyers pay premiums for predictability.
The challenge for technology service businesses is that project work often feels more profitable per engagement than recurring services. You can charge higher rates for project work because customers see immediate value. Managed services feels like commoditized support work that customers want to pay as little as possible for. So founders resist converting to recurring revenue because project margins look better.
But this is short-term thinking. Project revenue might generate higher margins per engagement, but recurring revenue generates higher margins per customer over time. A managed services customer paying $5,000 per month for 36 months is worth $180,000 in total revenue. That's different economics than a project customer who pays $30,000 once. You can invest more in customer acquisition, customer success, and service delivery when you're capturing $180,000 over three years.
The second problem with project revenue is that it doesn't survive poor sales execution. If your sales process breaks down, project revenue disappears within 60 to 90 days. Recurring revenue gives you six to 12 months to fix sales problems before revenue impact is severe. Buyers see this difference. They're buying businesses that can survive operational mistakes, not businesses that collapse if sales stutters.
Most technology service business owners know recurring revenue commands higher multiples. They just don't think the conversion is worth the short-term disruption and margin pressure. Then they try to exit and discover that buyers won't pay reasonable multiples for project-based revenue. The valuation gap forces them to either accept lower pricing or delay exit to build recurring revenue.
Converting from project-based IT services to recurring managed services takes 18 to 24 months. This isn't a quick switch. You're fundamentally changing your business model, your service delivery, your pricing, and your customer relationships.
The first challenge is pricing the conversion correctly. Most IT services firms underprice managed services because they're thinking in project terms. They look at the work they're doing and calculate hourly value, then convert that to monthly pricing. This undervalues the service. Managed services aren't priced by hours of work performed. They're priced by value delivered and problems prevented.
A customer paying $5,000 per month for managed IT services isn't paying for 40 hours of work. They're paying for reliable infrastructure, minimized downtime, proactive problem prevention, and access to expertise when needed. Some months you deliver 20 hours of work. Some months you deliver 60 hours. The value is in the outcome, not the hours. Price accordingly.
The second challenge is service definition. Project work has clear scope. You're building this thing or fixing that problem. Managed services are ongoing. What's included? What's extra? How do you handle scope creep? Most IT services firms struggle with this because they're used to saying yes to customer requests. In managed services, you need defined service tiers with clear boundaries. Basic tier includes X, Y, Z. Premium tier adds A, B, C. Everything else is project work on top of the managed services base.
The third challenge is service delivery transformation. Project work is reactive. Customer has a problem, you solve it. Managed services are proactive. You monitor systems, prevent problems before they happen, plan upgrades strategically. This requires different tools, different processes, different team skills. Your best project-based technicians might not be your best managed services technicians. Project work rewards fast problem-solving. Managed services rewards systematic prevention and customer relationship management.
The fourth challenge is customer education. Your existing project customers are used to paying for what they use. Converting them to monthly retainers requires explaining value differently. Some customers won't convert. They prefer project-based relationships. That's fine. Let them stay on project pricing. Focus your managed services sales on new customers and on existing customers who value predictability.
The conversion timeline looks like this. Month 0 to 6: Define service tiers, build service delivery infrastructure, train team on managed services approach. Month 6 to 12: Start selling managed services to new customers, test pricing and service delivery, refine based on learning. Month 12 to 18: Scale managed services sales, convert existing customers who are good fits, maintain project work for customers who prefer it. Month 18 to 24: Managed services becomes majority of revenue, project work is minority or premium-priced add-ons. During this conversion, total revenue might stay flat or grow slower than it would with pure project focus. That's expected. You're building a more valuable business, not maximizing short-term revenue. The business that converts from $3 million project revenue to $2.4 million managed services revenue plus $600,000 project revenue created more enterprise value than the business that grew project revenue to $3.6 million. Lower revenue, higher value, because revenue model changed.
Technology service businesses depend on technical expertise that's hard to transfer. You've built a team that knows how to solve complex problems, integrate systems, troubleshoot issues, design solutions. That expertise came from years of experience across hundreds of customer situations. A buyer can hire technicians, but they can't replicate your team's accumulated knowledge immediately.
This creates valuation risk. Buyers look at technology service businesses and ask: what happens if key technical people leave post-acquisition? If your best systems architect quits, can the business still deliver at the same level? If your senior developers leave, can new hires maintain code quality? If your network engineers depart, who handles complex infrastructure problems?
The answer to these questions determines whether buyers see transferable business value or whether they see dependency on specific people. If your business can maintain technical delivery quality despite personnel changes, that's transferable. If quality collapses when key people leave, that's not.
Documentation is the solution, but technical documentation in services businesses is different from technical documentation in product businesses. You're not documenting how a product works. You're documenting how to solve categories of problems, how to approach customer situations, how to make technical decisions, how to maintain quality standards.
Start with solution patterns. For the most common types of work you do, document the approach. How do you assess customer infrastructure? What do you look for? What questions do you ask? What red flags matter? How do you design solutions that balance customer constraints, technical best practices, and budget realities? Experienced technicians know this intuitively. New hires need it documented.
Document your quality standards. What does good look like for different types of work? How do you know when a solution is ready to deploy versus when it needs more refinement? What testing do you do? What documentation do you require? What constitutes acceptable technical debt versus unacceptable shortcuts? This helps new team members maintain quality even if they don't have your experience.
Document customer handling approaches. How do you manage customer expectations? How do you communicate technical issues to non-technical customers? How do you handle scope creep? How do you escalate problems? Technical expertise isn't just solving technical problems. It's managing customer relationships around technical delivery. That knowledge needs to transfer too.
The goal isn't perfect documentation that captures every situation. The goal is good enough documentation that new team members can deliver acceptable quality while they build experience. If documented approaches get them to 70 percent of your team's current quality, they can learn the remaining 30 percent through experience. If they're guessing without documentation, they might deliver 30 percent quality while learning, and customers leave before they improve. Documentation doesn't eliminate the risk of key personnel leaving. It reduces the risk enough that buyers can price it as manageable rather than fatal.
All eight drivers matter for technology service businesses, but three determine whether project dependency and technical expertise concentration destroy value or whether you've built transferable recurring revenue operations.
Recurring Revenue is the dominant driver for technology services valuation. Project-based revenue trades at 2.5 to 3.5 times EBITDA. Recurring managed services revenue trades at 4 to 6 times EBITDA. Same business, different revenue model, double the valuation. Converting from projects to managed services takes 18 to 24 months and might reduce short-term revenue growth, but it creates 50 to 100 percent more enterprise value. Buyers pay premiums for predictable cash flow and customer relationships that don't require constant reselling.
Switzerland Structure asks whether technical expertise is concentrated in one or two key people. Technology service businesses often have senior technicians or architects who handle all complex work. Junior technicians can handle routine tasks, but anything complicated escalates to the expert. That's not transferable. If the expert leaves post-acquisition, the business loses its capability to handle complex work. Building this requires documenting technical knowledge, cross-training team members, and ensuring expertise is distributed across multiple people instead of concentrated in one.
Hub and Spoke measures whether operations run without founder decisions. Technology service businesses score better here than many industries because project delivery is often systematized. But strategic decisions about technology direction, customer solutions, and service delivery still typically require founder involvement. Building Hub and Spoke requires documenting the decision frameworks for technical approaches, solution design, and customer management. Then delegating those decisions to a technical director or operations manager who can run delivery without founder oversight.
The other five drivers matter, especially Growth Potential in technology businesses where capabilities can expand rapidly. But these three determine whether technology service businesses can command premium multiples or whether they trade at commodity pricing because revenue is project-based, expertise is concentrated, and operations need founder involvement. We've seen technology service businesses with excellent Financial Performance, strong Customer Satisfaction, and capable teams sell below expectations because Recurring Revenue was zero, Switzerland Structure concentrated critical expertise in one or two people, and Hub and Spoke required founder involvement in technical decisions.
Most technology service business owners know recurring revenue commands higher multiples. They just don't think the conversion disruption is worth it until they see actual buyer offers for project-based revenue.
The Reality Check shows you where project revenue dependency, technical expertise concentration, or founder involvement is destroying your exit value. You'll see the valuation gap between where you are and where managed services businesses trade.
Cost: $997 one-time
Time: 90 minutes
Value: Truth about technology services transferability