IT Services Valuation Multiples: 2015-2024

Whether you’re planning to sell your IT business or explore an acquisition, understanding current valuation multiples is crucial for making informed decisions.

IT services companies often command higher valuation multiples than other industries due to the secular growth of the IT sector and firms’ ongoing digital transformations. The underlying tailwinds of the market make IT services companies attractive targets, leading to higher valuation multiples and premium prices when sold.

But not all IT companies are created equal. Factors such as size, growth potential, and profitability all affect the price potential buyers are willing to pay. 

If you want to improve the exit valuation of your business, you must take the time to understand what determines valuation multiples of IT services companies. You can then optimize critical metrics of your business to achieve a higher sale price for your business.

In this article, we delve into the valuations in IT Services M&A transactions and provide a roadmap that shows buyers and sellers what multiples to expect in this industry. We also examine the valuation of public IT Services companies, including what has driven their impressive boom and bust cycle over the past nine years.

Table of Contents

I. IT Services Valuation in M&A Transactions

II. IT Services Valuation in Public Markets

III. 2024 IT Services Outlook

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IT Services Valuation in M&A Transactions

We analyzed over 8,000 IT Services M&A transactions between 2015 and Q2 2024, looking at deals in both public and private markets. Of these, roughly 600 have disclosed valuation multiples, such as EV/Revenue or EV/EBITDA.

Our focus was to analyze how the multiples have changed, and further explore two of the most important factors influencing tech companies’ valuations: their size and location. 

Companies in the sample are mostly IT services businesses, software developers, MSP providers, systems integrators, and other professional services firms focused on IT.

EV/EBITDA vs EV/Revenue Multiples for IT services

The most common valuation method found when analyzing IT services companies is the EV/EBITDA multiple. This is because IT services companies don’t require significant upfront investments and are expected to generate positive cash flows early on.

Sometimes, the revenue multiple is used in a supporting role. For example, if a company hasn’t reached a normalized level of profit or is experiencing temporary earnings instability distorting the underlying profitability of the business.

Below is a summary of disclosed valuation multiples paid in IT Services M&A transactions between January 2015 to the 31 of July 2024.

A median EV/Revenue multiple of 1.4x and EV/EBITDA of 11.4x implies a margin of 12%. This is in line with most listed professional services firms.

Average EV/EBITDA Multiples for IT Services Companies

From the 342 deals in our sample for which the EV/EBITDA multiple was available, the median EV/EBITDA amounted to 11.1x. This number has remained fairly stable in the last 9 years, fluctuating in the 10.0x – 12.5x range.

In the first half of 2024, the median multiple for transactions nearly doubled to 18.4x, up from 9.9x in 2023, with upper-quartile deals reaching record highs. However, this increase should be interpreted cautiously due to the small sample size—only 5 transactions with publicly available financial data were included in 2024.

Average EV/Revenue Multiples for IT Services Companies

Between 2015 and 2020, median revenue multiples remained stable, hovering between 1.1x and 1.6x. They steadily rose from the end of 2020 and throughout 2021, reaching more than double by the end of 2022. By Q4 2023, however, they decreased back to pre-pandemic levels at 1.4x. In H1 2024, the multiples expanded to levels seen in 2022, indicating a slight recovery from the 2022-2023 compression.

IT Services Multiples Over Time

Valuation multiples in IT services M&A transactions were remarkably stable over the analyzed period. Changes in EV/EBITDA multiples were negligible, and even the 1st and 3rd quartile figures barely moved, except for the boom-and-bust years of 2021 and 2022.

EV/Revenue multiples behaved similarly but continued to rise throughout 2022 (from the previous 1.0-1.5x level to 2.4x). They steeply declined in 2023, however, reaching 1.4x by the end of the fourth quarter. In the second half of 2024, revenue multiples recovered to a median if 1.9x.

Our combined data shows that the jump in private transactions wasn’t as strong as in the public markets, where the one-year increase in average revenue multiple exceeded 100%. Nevertheless, there was a big difference in the median revenue multiple between 2020 and 2022: +1.2x or 100%. The valuations in the 1st and 3rd quartiles also rose markedly.

One crucial factor is the rise in private equity activity. Out of disclosed 600+ deals since 2015, more than 15% were closed by the PE/VC industry. For example, in early 2022, Inetum SA was acquired by Bain Capital and Renaissance Partners for more than $2B. In 2021, Carlyle Group bought Hexaware Technologies for $3B.

But it’s not just mega deals that financial investors are interested in. Many buyers also look for smaller companies. In our sample, we found the median size of a PE/VC deal to be $50M with 25% not exceeding $13M. 

Size Effect on Valuation Multiples

Company size is one of the most critical factors determining the valuations of IT services companies. Although professional services companies tend to have similar business models, regardless of their size, their valuation multiples vary widely. 

Valuations of small companies in our sample (less than $5M deal size) appear to be substantially lower, 0.8x revenue and 6.2x EBITDA. Figures for deals between $50M and $100M are almost twice as high. 

Usually, larger professional services businesses carry less risk. Big companies can serve larger enterprise accounts and have enough staff or software to manage big projects. Their development and HR processes are more advanced. Because their customer base is more diverse, losing a large account does not significantly affect revenue. A large company’s team – one of the crucial intangible assets of a company – is less likely to suffer from key persons leaving.

Moreover, potential buyers usually have a defined investment mandate. Private equity investors typically have a minimum revenue/size of the deal, so competition for larger deals is higher. At the same time, strategic investors need a combination of deal value and impact on their business to make a deal worthwhile. 

Location Effect on Valuation Multiple

The location of a company’s headquarters can affect its price.

Our review shows that European, Asian, and American companies all have similar valuations in terms of EV/EBITDA. When we consider the rest of the world, a difference becomes apparent. 

Companies outside these regions were valued significantly lower (7.2x vs. 10-14.3x). This may be because these markets have a smaller number of investors and struggle to internationalize or acquire clients from developed countries. The political risk of emerging markets also contributes to reduced valuations.

Naturally, North America is where the most significant deals happen, with a median deal size of $82M compared to $39M for the entire sample. The United States is a dominant market with a historically strong technology sector and the world’s biggest investor interest. One caveat is that many companies are registered in the USA and have a sales office there, but conduct most of their operations in emerging markets. 

Asia had the highest multiples, exceeding North America’s by almost 2x.. Reasons for overvaluation may be heavy investment in technology, particularly in China, and a focus on investing in domestic ventures. 

IT Services Valuation in Public Markets

We wanted to understand better the valuation of public IT services companies and how they’ve evolved between 2015 to Q2 2024. Our sample group included 36 IT Consulting and Other Services companies (GICS classification) that had a market capitalization of over $1B as of 31 December 2022. 

To get a more segmented view based on operations, we split our sample group into two categories:

1. Software Development: Companies that help clients with business transformation through designing and building software-based solutions. This software then becomes proprietary to the client. Software development companies typically have higher growth rates than IT consulting companies.
   
2. IT Consulting: Companies that provide managed services (MSPs) and consulting services, typically including cloud migration, analytics and automation, security, workplace management, and integration of third-party products such as SAP, Microsoft Dynamics, and Salesforce. These companies are also sometimes value-added resellers (VAR) of hardware and software products.

Software Development and IT Consulting Valuation Multiples

The median EBITDA multiple of software development companies was consistently higher than that of IT consulting. Both segments had remarkably stable median EBITDA multiples until 2020, at around 14x for software development and 11x for IT consulting.

With the pandemic outbreak, the stability ended and sent the multiples on a roller coaster ride.

The median EBITDA multiple for software development companies quadrupled to 43.3x by the end of 2021. The industry could only hold these record-high valuations for a short time, however. Over the next 12 months, the median EBITDA multiple more than halved and have declined to 2015-18 level of around 15 by the end of Q2 2024. We have been closely tracking the probable divergence of EV/EBITDA multiples between IT Consulting and Software Development companies. In H1 2024, Software Development multiples initially converged with IT Consulting but then experienced an uptick in Q2, rising to 15.1x compared to IT Consulting’s 13.6x

Valuations for IT consulting companies experienced little volatility before the pandemic outbreak. Once the world went into lockdown, IT consulting valuations followed a similar path to software development, peaking at 17.1x EBITDA at the end of 2021 and declining to 10.9x in the following 18 months. Revenue multiples painted the same picture, growing from 1.4x to 2.9x but falling with minor fluctuations to 2.1x by the end of Q2 2024. 

Public Market Valuation Drivers

1) Revenue Growth

The pandemic rapidly accelerated the demand for both types of services, as evident by the massive jumps in the median YoY revenue growths. This created a pull-forward effect with companies advancing their expenditure on digitalization at a large scale. As expected, both segments eventually reached a turning point in 2H 2021. Their growth rates have been declining since, albeit at a much steadier pace than multiples which halved in just three months.

The median revenue growth for Software Development companies was quite volatile even before the pandemic, but generally stayed around 15-20% overall. In Q2 2020, it recorded its lowest point at around 10%, and peaked five quarters later in Q3 2021 at 38.5%. Since then, it’s been steadily declining and is down by more than 34pp as of Q2 2024.

For IT consulting companies, median revenue growth was less volatile but also notably lower than that of software development. It fell into negative territory in Q2 2020 at -1.1% but quickly recovered and peaked at 19.5% in Q2 2021. Similarly to Software Development, median YoY revenue growth for IT Consulting companies has deteriorated to -0.7% by Q2 2024.

EBITDA Margin

EBITDA margin has been relatively stable for software development and IT consulting companies, with a slight upward trend between 2015 to Q3 2023. Companies from both segments typically operated at 12-17% EBITDA margins throughout the observed period.

At the end of Q4 2023, the median EBITDA margin for Software Development sharply declined to 13.7%, falling below IT Consulting’s 13.9%. This trend persisted through H1 2024, with Software Development margins continuing to converge with those of IT Consulting, eventually dropping below them in the last two quarters.

During COVID times, Software Development companies were able to increase prices on the back of the significant surge in demand. This led to margin improvement. Starting 2020 at a low of 12.2%, the median EBITDA margin peaked at the end of the year at 17.4%.

The median EBITDA margin of IT consulting companies followed a similar path over the same 12-month period. Its performance more closely resembled what was happening in global markets; however, it only started to proliferate after the dip in Q1 2020. In contrast, software development companies’ median EBITDA margin grew throughout 2020.

After the steep increase in 2020, median EBITDA margins became more similar for software development and IT consulting companies in 2021-2022. Both groups’ margins stayed at around 15-17%. With a proven and resilient business model, the profitability of IT services companies avoided the swings caused by unprecedented inflation, monetary tightening, and the war in Ukraine.

Market Sentiment

Macroeconomic factors played an essential role in the massive changes of multiples.

Technology companies were already one of the key beneficiaries of the digitalization movement before Covid-19. This trend accelerated with the pandemic outbreak as companies were forced to rapidly step up their technology efforts.

Tailwinds from monetary and fiscal policy and exceptional investors’ optimism pushed IT services multiples to unprecedented levels. The party soon ended, however, with 2022 kicking off with a series of adverse events. As inflation turned from “transitory” to sticky, central banks took a U-turn and implemented a series of interest rate hikes. With a significantly higher cost of capital and discount rates, valuations everywhere naturally dived.

The Russian invasion of Ukraine further dampened investor sentiment. The valuations of software development companies were far from immune to these macro headwinds, especially considering that many companies have delivery centers in Eastern Europe.

Despite most fundamental metrics being well above pre-COVID levels, the median EBITDA multiple almost halved in the first three months of 2022 and continued to decline throughout that year.

Market sentiment drove some of the change in multiples of IT consulting companies, but they were much less exposed to the investors’ mania of 2020 and 2021. We believe this is because of the difference in operations. Services offered by IT consulting companies are more labor intensive, a detracting factor under the growing labor shortage. These companies also face stronger competition where it’s challenging to differentiate, and the decision is often based on price. Lastly, services offered by IT consulting companies are more commodity-like while software development is considered more niche.  

2024 IT Services Outlook

• We expect the slowdown in IT Services M&A activity to continue in the early months of 2024, followed by a moderate pickup in dealmaking by mid-Q2 2024. We have seen a slowdown this year in quarterly results and guidance of listed companies but expect the tides to start turning mid to late next year as bigger deals start to come back.
• As several companies in the IT Services space addressed the consequences of overhiring in previous periods by undertaking right-sizing initiatives and announcing layoffs, this is further expected to allow these companies to maintain healthy profit margins going into 2024. We are of the view that the layoff frenzy period is behind us.
• With inflation slowly but steadily cooling down across major economies, the cost and wage pressures on IT Services companies should ease. We believe companies are likely to find it easier to manage costs as the prospect of a weaker labor market prevails.
• One of the biggest themes in 2024 will be the expectations of interest rate cuts in 2024. This will likely affect the IT services industry positively through a pickup in dealmaking activity and the potential for better-reported earnings. However, it is important to note that monetary policy is still restrictive after Q3 2023, and with any interest rate cuts in 2024, the performance and valuation changes of IT companies might lag by one or two quarters.
• We expect some segments will show more resilience relative to peers:
  • Maintenance projects for enterprise customers: Large Fortune 500 companies need to continue to invest in mission-critical systems.
  • Cybersecurity: More companies are investing in cyber defense, given elevated security risks.
  • Defense: Defense companies and governments have increased budgets, including for development and systems integration.
• We believe that the sector will witness an increased integration of artificial intelligence (AI) across various IT service segments. As businesses continue to focus on efficiency, automation, and data-driven decision-making, the demand for AI-powered solutions within IT services is projected to grow. This trend is likely to drive innovation and differentiation among IT service providers.
• Consolidation in certain segments will continue as the private equity-backed platforms are still looking to grow in ecosystems, e.g. Salesforce, SAP, ServiceNow, and Microsoft.
• The impact of a weaker US dollar is a key factor shaping the 2024 outlook for the IT Services landscape. With a weaker US dollar, companies that benefited from the dollar appreciation previously face tougher years and will require strategic decision-making to hedge the impact