Recurring Revenue Valuation Starts With Sustainable Earnings

Separate the Revenue Before Discussing Value

The MSP model counts managed seat fees and recurring product as recurring revenue. Its US example has $3,634,615 of annual revenue, split into $1,890,000 of managed services, $763,269 of recurring product, $690,577 of hardware, and $290,769 of projects.

Those lines represent 52%, 21%, 19%, and 8% of the total respectively. The recurring share is 52% plus 21%, or 73%. That leaves hardware and projects at a combined 27%. These are planning inputs for the example, not a required mix for your business.

Keep the client agreement behind the classification. A monthly invoice can contain a continuing service fee and an installment for a particular project. Identify what each payment represents before calling the whole invoice recurring revenue.

Use the same definitions over the period you show an adviser. If the way you bundle or code an offering has changed, reconcile the old and new presentation. A relabeled invoice doesn't establish a new stream of earnings.

A Hardware Sale Contains a Supplier Bill

For a hypothetical calculation using the model's US hardware line, take $690,577 of revenue and $483,404 of product cost. Subtract the cost: $690,577 - $483,404 = $207,173 of gross profit. Dividing $207,173 by $690,577 gives about 30%, matching the model's hardware margin. Gross profit is the amount left after the direct costs assigned to that revenue line.

The invoice total isn't earnings. Nor is the $207,173 automatically EBITDA. Sales work, administration, and other operating costs still need to be accounted for in the business. Identify how procurement, deployment, and support work are recorded so those costs aren't omitted or counted twice.

Show whether the sale came from a planned refresh, a particular client project, or another source. Support any replacement-sales forecast with the actual pipeline and relevant client plans. Don't call a historical hardware total dependable merely because sales occurred in successive periods.

A business can have a useful hardware offering without treating every hardware dollar like a monthly managed fee. Keep the commercial contribution and the uncertainty of repeating the sale visible together.

Project Revenue Needs Its Labor Beside It

The US example has $290,769 of project revenue. Its 50% project gross-margin allowance is $145,385 of labor cost, after rounding. The bottom-up project labor cost is instead $155,908, because project engineers carry unpaid onboarding as well as billed project work.

Calculate the example's project-line gross profit from its modeled cost: $290,769 - $155,908 = $134,861. Using the margin allowance instead would overstate that line's modeled result. Keep the cost basis explicit when presenting it.

The model treats onboarding as work whose fee is quoted and then waived for the managed agreement. It still consumes engineer time. A project-margin report that leaves that labor somewhere unexplained doesn't give an adviser a reliable starting point.

For your own projects, show completed work, remaining obligations, actual labor, and the method used to estimate costs still to come. Keep sold backlog separate from opportunities. A proposal isn't a contracted project because it appears on the same sales report.

Value the Whole Earnings Base Consistently

EBITDA means earnings before interest, tax, depreciation, and amortization. In the MSP model it comes after the owner's fair-market salary. The US stable example produces $730,276 of EBITDA after all its revenue lines and operating costs, including the hardware and project work.

The model values that whole earnings result at $4,057,386, displaying a multiple of about 5.56 times EBITDA. That calculation already includes the example's non-recurring work. It doesn't value only the 73% recurring share and then assign hardware and projects no value.

Its valuation assumptions use the iTValuations 2025 market curve and require yearly review. The model also treats non-recurring revenue as discounted in its exit assumptions, but supplies no standard hardware or project haircut to apply to an individual deal. Don't manufacture one from the revenue shares.

A calculation taking 73% of the modeled value would therefore introduce a separate assumption. So would applying the full business multiple to the $690,577 hardware revenue. Neither follows from the model's earnings-based calculation.

Make the Sustainable-Earnings Assumptions Visible

Ask your adviser to state which earnings they expect to continue, what costs must remain to produce them, and how uncertainty changes their valuation approach. Keep any normalization adjustments visible. Normalization means adjusting the historical result to the stated ongoing operating basis, with support for each change.

A removed cost needs a reason it will actually stop. A replacement role needs an appropriate cost. Don't remove the owner's delivery labor while also assuming someone else will do it without pay. Keep the owner's fair-market salary before profit, as the model requires.

Separate a change in earnings from a change in the multiple. If the forecast removes work or changes staffing, recalculate the earnings first. Then apply the stated valuation method to that result. A lower recurring share alone doesn't tell you either number.

Prepare a Revenue-to-Earnings Schedule

Give finance and the delivery lead a shared schedule that can be traced back to the accounts. I would require the following ownership before taking it into a valuation discussion.

• Finance reconciles managed services, recurring product, hardware, and projects to the same completed-period revenue total.
• Finance assigns direct costs consistently and explains any changes in the accounting treatment between periods.
• The delivery lead identifies project labor, unpaid onboarding, remaining delivery obligations, and the staffing needed to meet them.
• The account or sales lead supports continuing agreements, sold backlog, and prospective work separately, without treating a forecast as a contract.
• The owner and adviser document proposed earnings adjustments, retained costs, and the valuation assumptions used after those adjustments.

Keep the resulting schedule beside your revenue-mix report. It lets you discuss a profitable hardware or project line without pretending it has the same commercial terms as a managed agreement. It also makes the proposed discount a calculation someone must explain, rather than a phrase everyone nods at.