Technology Company Valuation: Recurring Revenue, Profitability and Lender Review
Two technology companies with similar revenue can be worth very different amounts. One may earn steady profit from long-standing managed services clients, a diversified customer base and a team that runs without the owner. Another may depend on a few large projects, thin resale profit and a founder who handles every major account. Technology company valuation is less about the size of the top line and more about how much profit the business earns, how durable that profit is and how confidently a buyer and lender can expect it to continue.
This article is general information for buyers and owners of existing, operating, profitable technology companies, such as IT services firms, managed services providers and small established software businesses. It does not address valuing venture-backed or pre-profit companies and does not provide valuation benchmarks. A formal valuation should come from a qualified professional. Nothing here is legal, tax or financial advice.
Start With Documented Earnings
Buyers typically begin with the earnings shown in tax returns and financial statements, then consider adjustments such as owner compensation above or below a market salary, personal expenses and one-time costs. Each adjustment should be documented. Lenders frequently make their own adjustments and base their analysis on what they can verify.
Recurring Versus Project Revenue
Revenue from ongoing service agreements may be viewed differently from one-time projects, hardware sales or hourly consulting. Recurring revenue should never be assumed to continue, though; its value depends on contract terms, renewal history and how easily clients can leave. Buyers look at how much revenue is under written agreements, how long clients have stayed and how billing has changed over time. Our article on managed services contracts explains this review.
Profitability by Service Line
- Managed services: whether monthly pricing covers the labor and tools needed to support each client
- Projects: how consistently projects are won and whether they are priced to cover actual hours
- Product resale: how much profit hardware and software resale actually contributes
- Software subscriptions: for software businesses, hosting, support and maintenance costs against subscription revenue
Customer Concentration
If a small number of clients account for a large share of profit, the loss of one could change the business significantly. Concentration may affect price, structure and financing. See our article on IT company customer concentration.
Owner Dependence and Team Depth
A company where the owner holds client relationships, credentials and technical knowledge may be worth less to a buyer than one with a capable manager and documented processes. Our guide to technical staff retention covers what buyers look for.
Qualitative Factors
- Clear ownership of any software, scripts or tools the company built
- Security practices and incident history
- Vendor and partner relationships that may or may not transfer
- Quality of billing, ticketing and financial records
- Reputation and how clients describe the service
These are tested during technology company due diligence.
How Lenders View Value
Technology companies frequently have few hard assets, so much of the purchase price may be goodwill. Lenders generally base decisions on whether documented cash flow can support the proposed debt, not on the agreed price alone. A price that cash flow cannot support may require more buyer equity, seller financing or a lower price. To estimate payments on a proposed loan, try our SBA loan calculator.
US Professional Funding helps buyers finance the acquisition of existing, operating technology companies based on documented cash flow. Learn more about our technology acquisition financing.
