Valuation multiples are an essential metric to consider if you own an IT company and are thinking about an exit strategy.

IT services companies typically have higher valuation multiples than other businesses because they possess unique technical expertise and operate in a growing industry. As a result, these companies often fetch a premium price when sold.

However, it is essential to remember that not all IT companies are created equal. Factors such as size, growth potential, and profitability will affect the price potential buyers are willing to pay. As such, it is essential to understand what determines valuation multiples of IT services companies – with sufficient time, you can optimize critical metrics of your business to improve the exit valuations.

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

Table of Contents

I. IT Services Valuation in M&A Transactions

II. IT Services Valuation in Public Markets

III. 2023 IT Services Outlook

IT Services Valuation in M&A Transactions

Our analysis is based on over 7,000 M&A transactions completed between 2015 and 2022. We looked at deals in both public and private markets. Of them, roughly 500 have disclosed valuation multiples, such as EV/Revenue or EV/EBITDA.

We focused on the changes in those multiples in the last eight years and two of the most important factors influencing tech companies’ valuations – their size and geography.

The 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 used while analyzing IT services companies is the EV/EBITDA multiple, as the IT services companies do not require significant upfront investments and are expected to generate positive cash flows early on.

The revenue multiple is sometimes used in a supporting role, for example, if the company does not have a normalized profit level for some reason.

Average EV/EBITDA Multiples for IT Services Companies

Among 307 deals in our sample, for which the EV/EBITDA multiple was available, the median EV/EBITDA amounted to 11.0x. That number was quite stable in the last eight years – it has not dropped under 10x, and the highest value was 12.5x.

The 3rd quartile shows that there is a significant group of especially highly valued businesses, reaching close to 30.0x EBITDA in 2021. Among the reasons could be a strong management team, a large share of recurring revenue, or solid expertise in niche technology. Sometimes the IT service company has a proprietary software business on the side, resulting in a sum-of-parts company valuation for two business lines.

The market value of a company highly depends on the following metrics: revenue growth, EBITDA margin, recurring revenue, customer churn, employee turnover, and customer concentration.

Average EV/Revenue Multiples for IT Services Companies

Although rarely used for IT services businesses, revenue multiples can be a useful valuation method, as they are more commonly disclosed in private transactions – 509 deals in our sample.

Between 2015 and 2020, the median revenue multiples stayed stable, hovering between 1.1x and 1.6x. However, it has been steadily growing since 2021 and has more than doubled by the end of 2022.

A median EV/Revenue multiple of 1.3x and EV/EBITDA of 11.0x implies a margin of 12%, in line with most listed professional services firms.

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 over a number of consecutive years 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, except for continuing to rise throughout 2022 (from the previous 1.0-1.5x level to 2.4x), which is more in line with the valuations multiples for software companies.

In our combined data of public and private transactions, the jump was not 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 7,000 deals since 2015, more than 25% were closed by PE/VC industry. For example, in early 2022, Inetum SA was acquired by Bain Capital and Renaissance Partners for more than $2B, and in 2021 Carlyle Group bought Hexaware Technologies for $3B.

But not only the mega deals are of interest to financial investors; many buyers from this category look for smaller companies – the median size of a PE/VC deal in our sample is $226M, with 25% not exceeding $40M.

Size Effect on Valuation Multiples

Company size is one of the most critical factors determining the valuations of IT services companies. Although large and small professional service companies usually have similar business models, their valuation multiples vary widely.

Valuations of the small companies (less than $5M deal size) are therefore substantially lower – in our sample, 0.8x revenue and 6.1x EBITDA, while these figures for the deals between $50M and $100M are twice as high.

Usually, the larger the professional services business is, the less risky it gets. Big companies can serve larger enterprise accounts, delivering staff or software for big projects. Both development and HR processes are more advanced. The customer base is more diverse, so losing a large account does not significantly affect revenue. The team – one of the crucial intangible assets of the company – is less likely to suffer from key persons leaving.

Moreover, potential buyers usually have a defined investment mandate. The private equity investors typically have a minimum revenue/size of the deal, so the 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 for their attention.

Geography Effect on Valuation Multiple

The location of the company’s headquarters is not negligible for its price.

Our review shows that European, Asian, and American companies all have similar valuations in terms of EV/EBITDA. The difference is substantial when we consider the rest of the world, as companies outside of these regions were valued significantly lower (7.2x vs. 10-13x). Some of the reasons include a smaller number of investors in these markets and difficulties in internationalizing or acquiring clients from developed countries. Also, the political risks of emerging markets add a discount to the valuations.

Naturally, North America is where the most significant deals happen – the median deal size is $75M compared to $38M for the entire sample. The United States is a dominant market with a historically strong technology sector and the world’s biggest investors’ interest. One caveat is that many companies are only registered in the USA and have a sales office there, while most of the delivery happens in emerging markets.

Asia turned out to be the place with the highest multiples – slightly exceeding North America’s. Heavy investment in technology, primarily in China, and the focus on investing in domestic ventures could be one of the sources of overvaluation.

IT Services Valuation in Public Markets

We wanted to understand better the valuation of public IT services companies and how they have evolved between 2015 to 2022. Our sample group includes 37 IT Consulting and Other Services companies (GICS classification) that had a market capitalization of over $1B as of 31.12.2022. 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. Sometimes, those companies are also 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’ median EBITDA multiples were remarkably stable until 2020, at around 14x for software development and 11x for IT consulting.

EV/EBITDA for IT services companies

With the pandemic outbreak, this stability trend ended, sending the multiples on a roller coaster ride.

Software developers’ median EBITDA multiple quadrupled from 14.4x to 42.1x by the end of 2021. However, the industry could only hold these record-high valuations for a short time, with the median EBITDA multiple halving to 20.4x over the following 12 months. We saw a similar story in revenue multiples, first increasing from 2.0x to 7.6x during the first two years of the pandemic but ending in 2022 at 3.7x.

IT consulting companies’ valuations were much soberer than for software development, with very little volatility before the pandemic outbreak. Once the world went into lockdown mode, valuations of IT consulting companies followed a similar path as software development, peaking at 18.3x EBITDA at the end of 2021 and declining to 12.5x in the following 12 months. Revenue multiples painted the same picture, growing from 1.4x to 3.7x but falling to 2.1x by the end of 2022. 

Public Market Valuation Drivers

Revenue Growth

The rapid rise in multiples of IT services firms was largely driven by the temporarily improved financial results.

Revenue growth for IT Services companies

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 having to “bring forward” their expenditure on digitalization at a large scale. As expected, both segments eventually reached a turning point in 2H21. Their growth rates have been declining since, albeit at a much steadier pace than multiples which halved in just three months.

For software development companies, the median revenue growth was quite volatile even before the pandemic, but overall, it generally stayed above 10%. In Q2 2020, it recorded its lowest point at 8.7% and peaked five quarters later in Q3 2021 at 38.5%. It has been declining since, down by almost 15pp as of Q3 2022.

The median revenue growth of IT consulting companies 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 20.0% in Q2 2021. Like software development, IT consulting companies’ median YoY revenue growth halved by Q2 2022.


EBITDA margin has been relatively stable for software development and IT consulting companies, with a slight upward trend between 2015 to 2022. Companies from both segments typically operated at 12-16% EBITDA margins.

EBITDA margin for IT services companies

During COVID times, software development companies were able to raise prices on the back of the significant surge in demand, leading to margin improvement. Starting 2020 at a low of 12.2%, a median EBITDA margin peaked at the end of the year at 18.0%.

Over the same 12-month period, the median EBITDA margin of IT consulting companies followed a similar path. However, its performance more closely resembled what was happening in the global markets – only starting 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 17%. With the proven and resilient business model, the profitability of IT services companies avoided the swings caused by unprecedented inflation, monetary tightening, and 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 step up their technology efforts at record speed.

Tailwinds from monetary and fiscal policy and exceptional investors’ optimism pushed IT services multiples to unprecedented levels. However, the party ended soon as 2022 kicked 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 given that many companies have their delivery centers in Eastern Europe.

Overall, 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 2022

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, the services offered by IT consulting companies are more commodity-like, whereas software development is considered more niche.  

2023 IT Services Outlook

  • We expect a continuing slowdown in activity, as some of the digitization projects started during COVID are ending, companies cut budgets in fear of a recession, and many startups run out of funding to develop the product. The slowdown is already seen in quarterly results and guidance of listed companies.
  • The growing interest rates will affect the IT services industry through a slowdown in earnings. However, the multiple compression will not be as massive as in Software. Most IT services companies are cash-flow positive and have not experienced extreme overvaluation.
  • The slowdown could affect certain IT services segments, such as:
    • Outsourced development for startups: new capital raising rounds slow and tech startups cut costs. 
    • Fintech and blockchain development: many crypto-related companies go bankrupt, while investors take a step back from the markets, following the stock market losses.
    • Mobile applications and gaming: people continue to return to the office and spend more time on their mobile phones while commuting.  
  • We expect some segments will show more resilience:
    • Maintenance projects for enterprise customers: large Fortune 500 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.
  • Consolidation in certain segments will continue as the private equity-backed platforms are still looking to grow in ecosystems of e.g. Salesforce, SAP, ServiceNow, and Microsoft.
  • Temporary windfall for outsourcing companies with US customers receiving dollar-based revenue; delivery from emerging markets become even more attractive with the currency depreciation.

How to Value an IT Services Company

IT services are a fragmented industry with plenty of diversity: smaller companies competing for clients and talent with multi-billion dollar players. Some companies utilize a wide technology stack, while others focus on integrating a single vendor’s software.

All this diversity makes it difficult to put a precise multiple for a “median” IT services company. Still, we can observe how the valuations change over time and how size and location affect the valuation multiples.

If you are considering selling your business feel free to reach out to us to discuss potential outcomes.

About Aventis Advisors

Aventis Advisors is an M&A advisor focusing on technology and growth companies. We believe the world would be better off with fewer (but better quality) M&A deals done at the right moment for the company and its owners. Our goal is to provide honest, insight-driven advice, clearly laying out all the options for our clients – including the one to keep the status quo.

Get in touch with us to discuss how much your business could be worth and how the process looks.

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