Valuation Multiples for an IT Consulting Firm
IT consulting firms provide a wide variety of services to businesses, nonprofit organizations, governments, and the public sector. This may include custom IT software and hardware services, technical consulting, computer system development, etc… An industry report on IBIS World notes that there are over 457,000 IT consulting firms in America. With increasing demand, we can expect this industry to generate over $740 billion dollars in the coming years. As such, it may be an ideal time to buy or sell an IT consulting firm. However, the IT consulting industry is extremely fragmented and competitive. To succeed, it is important for operators to understand the value of an IT consulting firm. This includes learning about valuation multiples for an IT consulting firm.
Valuing an IT Consulting Firm
If you are looking to buy or sell an IT consulting firm, it is beneficial to learn the principles of valuing an IT consulting firm. To understand how to value an IT consulting firm, receive a business valuation. For buyers, a business valuation can help you determine a fair purchase price of an IT consulting firm. Additionally, you may learn about effective negotiation strategies. If you are looking to sell an IT consulting firm, a business valuation can help you decide on a fair listing price. In addition, receiving a business valuation will help you understand how to increase the value of an IT consulting firm.
Peak Business Valuation, business appraiser, works with IT consulting firms on a regular basis. We are happy to help you! At Peak, we can provide you with a business valuation for an IT consulting firm. In addition, we can answer any questions you may have about valuing an IT consulting firm. Start with a free consultation with Peak Business Valuation today!
See also Valuing an IT Consulting Firm, How to Value an IT Consulting Firm, and Value Drivers for an IT Consulting Firm.
Valuation Multiples for IT Consulting Firms
There are various valuation approaches that business appraisers use when valuing an IT consulting firm. The market approach is a popular valuation method that utilizes valuation multiples for IT consulting firms. In the diagram below, we share average market multiples for an IT consulting firm. However, these multiples are only averages. As such, they may not be applicable to your IT consulting firm. The best way to learn which multiples are suitable for your IT consulting firm is to receive a business valuation! Peak Business Valuation is here to help! Schedule a free consultation with Peak today!
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
Business appraisers often use valuation multiples to value an IT consulting firm. Multiples are similar to ratios. For instance, a common ratio in business valuation is the SDE multiple. SDE multiples compare the seller’s discretionary earnings of the IT consulting firm to its estimated value. Then, valuation experts compare your IT consulting firm to similar firms that recently sold on the open market. This process helps the experts determine an accurate range of value for your IT consulting firm.
For example, an IT consulting firm has $370,000 in seller’s discretionary earnings. If the firm receives a 2.62x SDE multiple, it has an estimated value of $969,400 ($370,000 times 2.62x). In contrast, if it receives a 3.18x multiple the implied value of the IT consulting firm would be $1,175,600 ($370,000 times 3.18x).
Peak Business Valuation is a professional business appraiser of IT consulting firms. We work with many individuals who are looking to buy, grow, or selling an IT consulting firm. Often, business appraisers at Peak use multiples to determine the value of an IT consulting firm. It is important to note that each IT consulting firm is different. As such, the range of value may vary. In the following sections, we discuss SDE, EBITDA, and REV multiples for IT consulting firms.
SDE Multiples for an IT Consulting Firm
Average SDE Multiple range: 2.52x – 3.38x
According to Peak’s data, IT consulting firms transact at an average SDE multiple of 2.52x – 3.38x. Business appraisers determine an implied value of an IT consulting firm by applying the seller’s discretionary earnings by the multiple. Refer to the following equation.
SDE X Multiple = Value of the Business
For instance, an IT consulting firm generates $630,000 in seller’s discretionary earnings and transacts at a 3.03x multiple. This example implies the value of the IT consulting firm is about $1,908,900.
$630,000 X 3.03x = $1,908,900
SDE multiples are common when determining the value of an IT consulting firm. To determine the seller’s discretionary earnings, valuation experts add back any expenses the new operator may not incur to the value of the IT consulting firm. Some common add-backs include the owner’s compensation, personal expenses, and non-recurring or non-related business expenses. By considering these factors, appraisers can determine the cash flow potential of the IT consulting firm. When valuing an IT consulting firm it is important to understand cash flow.
EBITDA Multiples for IT Consulting Firms
Average EBITDA Multiple range: 3.70x – 4.32x
On average, IT consulting firms transact at an EBITDA multiple range of 3.70x – 4.32x. Business appraisers apply this multiple to EBITDA to determine a fair market value of the business. See the equation below.
EBITDA X Multiple = Value of the Business
For example, an IT consulting firm has an EBITDA of $516,000. It transacts at an EBITDA multiple of 3.95x. In this case, the IT consulting firm is worth $2,038,200.
$516,000 X 3.95x = $2,038,200
The EBITDA multiple measures an IT consulting firm’s return on investment (ROI). Business appraisers at Peak Business Valuation often prefer EBITDA multiples for IT consulting firms because they help normalize differences. These ratios allow the valuation expert to compare your IT consulting firm to similar businesses. Normalized ratios can also provide a more accurate projection of the future earnings a buyer can expect from an IT consulting firm.
REV Multiples for an IT Consulting Firm
Average REV Multiple range: 0.78x – 0.94x
IT consulting firms transact at an average revenue multiple range of 0.78x – 0.94x. At Peak, a business appraiser can derive the implied value of an IT consulting firm by multiplying the most recent 12-months of revenue by the multiple. The calculation is as follows.
Revenue X Multiple = Value of the Business
An IT consulting firm makes $2,200,000 in revenue. It then transacts at a 0.85x multiple. In this example, the IT consulting firm is worth about $1,870,000.
$2,200,000 X 0.85x = $1,870,000
REV multiples measure the total amount of revenue generated by the IT consulting firm. REV multiples are less common when valuing IT consulting firms. Valuation experts typically rely on the cash flow multiples – SDE and EBITDA. However, business appraisers use their knowledge and expertise to determine which methods and multiples are best for your IT consulting firm.
Summary
Peak Business Valuation may use various methods and multiples when valuing an IT consulting firm. Understanding valuation multiples for an IT consulting firm is crucial whether you are buying or selling an IT consulting firm. To know which methods and multiples are most applicable to your IT consulting firm, receive a business valuation. During a business valuation, you will also learn how to maximize the value of an IT consulting firm.
Peak Business Valuation, business appraiser, works with many IT consulting firms throughout the country. We are happy to help you! With Peak, you can receive a business valuation for an IT consulting firm. In addition, we are happy to answer any questions you may have on valuation multiples for an IT consulting firm. Start today by scheduling a free consultation with Peak Business Valuation.
