IT services and managed service provider valuations.

Recurring revenue has to be separated from everything else

An IT services business typically earns from three sources: managed services agreements that bill monthly for monitoring, support and administration; project work such as migrations, installations and consulting; and the resale of hardware, software licences and cloud subscriptions. The three carry very different certainty and margin, and a single revenue figure blends them into something that cannot be assessed.

The valuer's first request is a schedule that splits revenue by source and by month, reconciled to the accounts. Managed services revenue under contract is the most predictable and usually carries the value. Project income depends on winning the next job, and resale can be a large share of revenue while contributing little profit. Reading the business through that split is the foundation of the valuation approach, and it determines how much weight each stream can bear.

Contract terms and churn decide how durable the recurring revenue is

Managed services agreements vary widely. Some run for fixed terms with automatic renewal and notice periods; others are month to month in practice regardless of what the paperwork says. The valuer reads the agreements for term, termination rights, price review mechanisms, minimum seat or device counts and what happens when a client's headcount falls. A contracted base with a long average remaining term and orderly renewals supports a stronger view than one that could unwind in a month.

Churn is then measured from a monthly schedule of recurring revenue by client, showing starts, ends, upgrades and downgrades. That shows how much revenue is lost and added each period, and whether existing clients are growing or contracting. Definitions must be consistent across periods, and the schedule must reconcile to the accounts rather than to a sales dashboard. Where a few clients have recently left, the reasons matter as much as the amount.

Gross margin by service line shows where the earnings come from

Managed services, projects and resale each have their own cost of delivery, and the mix determines the true margin. Managed services margin depends on technician time per client, the cost of the tools and platforms used to deliver it and how far routine work has been automated. Project margin depends on estimating and scope control. Resale margin is usually thin and can be negative once the time spent procuring and configuring is counted.

The valuer wants gross margin by service line, with labour allocated honestly. A business that reports a healthy blended margin because resale is booked at gross and technician time is buried in overheads will look different once the allocation is corrected. Owner remuneration and any technical work the owner performs are adjusted to market, and the EBITDA adjustments guide covers the other normalisations that usually apply.

Clients, vendors and technicians are the three concentrations

Client concentration is examined by revenue and by margin. Revenue per client and the mix of client sizes matter because a base of many small clients churns differently from a base of a few large ones, and the loss of a large client can remove a disproportionate share of margin. Contract terms for the largest accounts are read with particular care.

Vendor and platform dependence is the second concentration. Most MSPs build their service on a small number of vendor platforms and resell their licences, which is normal, but the partner agreements, the margin on resold licences and the portability of the service stack all bear on risk. A vendor changing its partner terms can move an MSP's margin without the MSP changing anything.

Technician dependence is the third. Where a few engineers hold the knowledge of client environments in their heads rather than in documentation, a buyer inherits a transition risk. Documentation standards, ticketing history, runbooks and the depth of the team behind each client are evidence that the service can continue without any one person. Security and compliance obligations sit alongside this: the business's own security posture, its obligations under client contracts and any incident history are risk factors to be disclosed at scoping, and their legal effect is a matter for your lawyer.

An MSP is not a software business, and the difference matters

MSP recurring revenue is sometimes described using software terminology, and the comparison flatters it. A software business owns a product and can add customers without adding people in proportion. An MSP delivers a service through technicians using platforms it licenses from others, so each new client brings delivery cost and the margin is capped by labour. The recurring revenue is valuable, but it is service revenue and is assessed through its gross margin and delivery model. Our valuation multiples guide explains why a multiple from one business model cannot simply be carried to another.

Records that sharpen an IT services or MSP valuation

The questions an owner or adviser should have ready

Before a valuation begins, be able to say what share of revenue is contracted managed services, what the average remaining term and renewal pattern look like, what churn has been for the last two or three years, what the gross margin is on each service line, which clients and vendors account for most of the revenue, and how well the client environments are documented. Clear answers narrow the range and shorten the work.

Valuation Group is based in Double Bay, Sydney, and works with owners and their accountants Australia-wide by phone, video and secure document exchange. Tell us whether the matter is a sale, a shareholder exit or another purpose, and we will scope the work from there.

General business valuation guidance. Service suitability, specialist input and fee are assessed for the individual matter.