How to value an IT company: recurring revenue, churn and the team
Value Up editorial team · · 4 min read
IT companies are often valued higher than other industries, but only when revenue is predictable. A buyer looks not just for growth but for durable recurring revenue and a team that works without the founder.
Recurring revenue
Subscriptions and long-term contracts are valued above one-off projects: they give a predictable stream. The buyer separately counts the share of recurring revenue and the length of the contracts.
Churn and retention
How many customers leave and how much revenue is lost in a period is one of the main measures. High churn cancels out the effect of sales growth.
Customer concentration
If one or two customers provide a significant share of revenue, losing either changes the picture sharply. The buyer prices that in.
Rights to the code and technology
- who owns the code and the rights to the product, especially if contractors wrote it;
- the use of open-source libraries and their licences;
- technical debt: how hard the product is to develop and maintain;
- documentation and data security.
The team and dependence on the founder
- knowledge of the system held by several people, not one developer;
- heads of development and sales who are not the owner;
- contracts with key employees.
What raises value
- growing, diversified recurring revenue;
- low churn and clear economics of acquiring customers;
- clean rights to the code;
- a team that works without the founder.
Valuing an IT company or SaaS business →
For information only. This is not a licensed appraiser’s opinion and not legal or investment advice.