I run a small IT managed services company with about 40 clients on retainer. When I talked to a couple of business brokers last month, both gave me valuations that felt way low compared to what I see in SaaS or product businesses. One even said service businesses are 'harder to sell' and applied a discount. Is this common? What are they seeing that I'm missing?
Brokerage
Why some brokers undervalue service businesses
It's common. Brokers often lean on rules of thumb that favor asset-hevay or recurring-revenue businesses with clean contracts. Service businesses with client concentration or owner-dependent relationships get dinged.
Are your contracts month-to-month or annual? That alone can swing a valuation. Brokers see churn risk everywhere if there's no lock-in.
Most are month-to-month with a 30-day out. I've had some clients for 8+ years, but I get why that looks risky on paper.
Also depends on how much of the work runs through you personally. If you're the main account manager or the one clients call, a buyer sees a business that might lose value when you leave. That's not necessarily fair, but it's a real discount factor.
I sold a marketing agency two yearrs ago. One broker quoted me 2.5x earnings, another said 4x if I could show a management team in place. The difference was almost entirely about key-person risk. Might be worth getting a second or third opinion before you settle.
Some brokers also just don't have buyers for service businesses in their network. If their book is mostly manufacturing or retail, they'll push you toward a lower number because that's what they know how to move.
That's a good point. Ask the broker what percentage of their recent deals were service businesses. If the answer is vague, that tells you something.
One more thing: service businesses often have lower margins after you account for labor and tooling. Brokers might be comparing your EBITDA to a product company's and not adjusting for the differen risk profile. Worth checking how they built the multiple.