Taking over an IT business: how to evaluate maintenance contracts?

Why maintenance contracts are strategic in IT

Maintenance contracts form the backbone of an IT business. Unlike one-off projects, they generate predictable recurring revenue that stabilises turnover.

This recurrence often represents 40 to 70% of the total value of an IT business during a valuation. A solid portfolio of IT contracts reassures buyers and facilitates bank financing.

As with maintenance contracts in plumbing, revenue stability takes precedence over one-off volume.

The different types of IT maintenance contracts

IT contracts come in several categories, each with its own value for a buyer:

• Technical support: user assistance, helpline, incident resolution
• Managed services: complete management of the client's IT infrastructure
• Preventive maintenance: updates, backups, proactive monitoring
• SLA (Service Level Agreement): availability commitments with penalties
• Software licences with support: annual renewals with technical assistance

Each type presents a different level of recurrence and margin.

Analysing the quality and stability of contracts

The value of a maintenance portfolio is not measured solely by turnover. The solidity and sustainability of client commitments determine the real value during a takeover.

Three essential criteria enable you to evaluate this stability and identify hidden risks in the existing portfolio.

Duration and termination conditions

Carefully examine the remaining duration of each contract. Multi-year contracts offer better security than annual commitments that can be terminated at short notice.

Identify IT contracts that expire within 12 months of the takeover. Check automatic renewal clauses and termination notice periods: a 30-day notice period represents a higher risk than a 6-month notice period.

Exit conditions reveal the strength of the client relationship.

Historical renewal rate

Request renewal statistics for the last 3 to 5 years. A rate below 80% should alert you to service quality or pricing competitiveness issues.

Analyse the specific reasons for non-renewals: dissatisfaction with quality, prices too high, client departure, acquisition by a competitor. This rate is the best indicator of client satisfaction.

A solid track record provides reassurance about post-takeover continuity.

Client concentration and dependency risk

Calculate the share of turnover generated by the main clients. If a single client represents more than 30% of recurring revenue, the dependency risk is major.

Establish a concentration index for the top 3 or top 5 clients. This dependency should impact the takeover price downwards or justify specific contractual guarantees.

As with dependence on the outgoing owner, client concentration weakens the business.

Evaluating the real profitability of contracts

The turnover from IT contracts is not enough. Net profitability determines the real value of the portfolio during a takeover.

Some contracts generate significant volume but mobilise disproportionate resources. Analyse the real margin of each commitment to identify profitable contracts and those that destroy value.

Direct costs and necessary resources

Identify all hidden costs: actual technician time, third-party software licences, cloud infrastructure, on-site travel. Compare time actually spent with time billed.

Some maintenance contracts are under-priced and mobilise excessive resources. Calculate the net margin per contract including all direct and indirect costs.

This analysis, similar to evaluating margins in renovation, reveals real profitability.

Price clauses and indexation

Check whether contracts include price adjustment clauses: automatic annual indexation, periodic price review, inflation-linked increase clause.

Analyse the history of increases actually applied. Identify contracts locked at obsolete rates for several years without review.

These frozen contracts negatively impact future profitability and must be renegotiated quickly after the takeover.

Verifying the transferability of contracts

A profitable portfolio of IT contracts guarantees nothing if the commitments are not transferable to the buyer. This legal and operational aspect is often overlooked.

Two critical dimensions determine transferability: contractual clauses authorising or limiting transfer, and operational capacity to resume services without service interruption.

Change of control clauses

Carefully read each contract to identify 'change of control' clauses. Some clients have an automatic right of termination in the event of a change of ownership.

Negotiate financial guarantees or an extended transition period with the seller to secure renewals. If necessary, involve a lawyer specialising in commercial law.

The Leez expert network can support you on these legal aspects.

Skills transfer and documentation

Verify that client environments are documented: network architectures, hardware inventories, intervention procedures, passwords, technical contacts. Insufficient documentation represents a major risk.

Identify the technical skills required in the current team. Plan a transition period with the seller or key technicians to ensure knowledge transfer.

Retaining key employees often determines the success of the takeover.

Calculating the value of contracts in the takeover price

IT businesses are often valued using the recurring revenue multiple method (ARR/MRR). The multiple applied generally varies between 1x and 3x annual recurring revenue.

Adjust this multiple according to the criteria analysed: contract stability (renewal rate), net profitability, transferability, client concentration. An average quality portfolio justifies a multiple of 1.5x, whilst a solid portfolio can reach 2.5x to 3x.

Example: CHF 200,000 recurring revenue with 85% renewal and 25% margin = valuation of CHF 300,000 to 400,000. Use the Leez valuation tool or consult an expert via our partner network.

Questions to ask the seller

During due diligence, ask these essential questions to evaluate the maintenance portfolio:

• Complete list of active IT contracts with expiry dates and annual amounts
• Renewal history over the last 3 years by client
• Documented reasons for terminations and non-renewals
• Average monthly time spent per contract (by technician)
• Major incidents occurring in the last 12 months
• Termination clauses and notice periods for each contract
• Client satisfaction score (NPS or surveys if available)
• Migration projects or technological changes planned by clients

Consult the IT businesses available on Leez to identify takeover opportunities.

Maintenance contracts often form the core value of an IT business. Their in-depth analysis enables you to identify real recurring revenue, client concentration risks and the effective profitability of each contract. Systematically examine the remaining duration, termination clauses, historical renewal rates and transferability conditions before finalising your takeover.

Technical documentation, necessary internal skills and indexation clauses directly influence the value you should attribute to these contracts in your valuation. Do not neglect hidden costs: human resources, tools, subcontracting and management time can significantly reduce displayed margins.

Are you considering taking over an IT business? Explore the businesses for sale on Leez or contact our expert network to support you in the technical and financial analysis of maintenance contracts.