Industrials & Services
Project and recurring revenue do not deserve the same multiple
Where a business carries both, the discipline is to report them separately for at least two years before a sale. A buyer obliged to construct the split will construct it conservatively.
This follows from the aftermarket question but is worth stating on its own, because it applies well beyond equipment and because it changes how a business should be run rather than only how it is presented.
Separate reporting, separate everything
Reporting the two streams separately means more than splitting a revenue line. Each needs its own gross margin, its own direct cost base, its own working capital profile, and ideally its own commercial accountability.
Project work consumes working capital. It requires materials ahead of payment, it carries retention and milestone risk, and its cash conversion is poor relative to its reported margin. Recurring service revenue is close to the opposite, frequently billed in advance and consuming almost no working capital. Blended together, both are misrepresented, and an acquirer building a cash flow model from blended figures will produce a number that flatters neither.
The buyer universe changes
The composition also determines who will look at the business at all. Financial sponsors underwriting leverage need cash flow they can forecast, and many will not engage with a business whose revenue is predominantly project-based, regardless of its quality or its history.
A business that can demonstrate two-thirds recurring revenue is therefore not simply worth more per unit of EBITDA. It is visible to a larger set of acquirers, which is what produces competitive tension, which is what actually sets the price.
Two years, not two months
The reason this has to start early is evidential. A split produced from the accounting system during a process is an analysis. A split that has been reported to a board monthly for two years, with consistent definitions and no retrospective reclassification, is a fact.
Acquirers are experienced at telling the difference, and they discount the first heavily. The reclassification that happens in the year a business goes to market is among the first things a quality of earnings review looks for.
If the split has never been reported and a transaction is closer than two years away, report it from today and be transparent that it is newly separated. A clearly labelled recent change is credible. A silently restated history is not.
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