Propelled by globalization, IT staffing and IT consulting is one of the fastest growing businesses in the United States. Over 73 percent of the Fortune 2000 companies outsource some part of their IT needs.*
There are five factors used in the valuation of IT staffing businesses:
- Roster: A client list with Fortune 2000 companies across different industry verticals boosts company valuation. Businesses receiving about 75 percent of revenue from Fortune 2000 companies across 3 or more industries can command a valuation of up to 2 to 3 times the revenue.
- On shore VS Offshore delivery: IT companies with onshore and offshore delivery and sourcing capabilities are valued more. Ideally, a model that is 70 percent offshore helps increase EBIDTA margins by at least 15 to 20 percent.
- Accounts Receivables: Typically, IT staffing and consulting businesses incur high initial costs with long client payment cycles. Ninety percent of accounts receivables concentrated within 90 days is ideal. Outstanding amounts over 90 days can lead to a cash flow crunch.
- Client/ Revenue concentration: Businesses with a single client that accounts for over 10 to 15 percent of the revenue have a lower value than businesses with a highly diversified client mix. Too much dependency on one revenue source is risky.
- Liability: Unlimited liabilities, INS violations while filing work visas for employees and a lack luster D&B report can significantly affect a business’s valuation.
* 2005 Duke University CIBER/Archstone Consulting study