Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
Evolution Capital · 25 Years · 250+ Deals
Forecast or Fantasy?
Buyers in IT services M&A pay for what they can verify, not what you forecast. Most management projections are optimistic by 30 to 50%. Understanding what buyers actually rely on, and how to build genuine credibility for your growth story, is the difference between a premium valuation and a frustrating one.
Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
25+
Years in technology M&A
250+
Transactions
$1bn+
In completed transactions
“Buyers have seen far too many hockey sticks to pay for hope.
They pay for evidence.”
Evolution Capital · From the trenches
- At a Glance
What You'll Learn.
Understand how buyers assess your balance sheet, how cash, debt and working capital affect your final proceeds, and what you can do 12–18 months before a sale to avoid costly surprises.
Table of Contents
01
Why the Balance Sheet Matters
02
How Enterprise Value Becomes Equity Value
03
The Net Cash & Debt Schedule
04
Working Capital Explained
05
Completion Accounts vs Locked Box
06
EBITDA vs Free Cash Flow
07
Common Balance Sheet Risks
08
How Buyers Review Your Balance Sheet
09
Getting Your Sheet in Order
10
How Evolution Capital Can Help
11
Frequently Asked Questions
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Throughout my time on deals, it never ceases to amaze me how optimistic management forecasts are. I see more hockey sticks than watching the highlights from the US beating Canada in both ice hockey gold medal games at the Milan Winter Olympics earlier this year. The graph goes up, it always goes up, and it goes up steeply.
And in fairness to sellers, I understand why. You are selling your baby. You know it better than anyone. You have lived through the hard years and you can see, more clearly than any outside observer, what this business is capable of. Founders have full belief in what they have built and what it can achieve, and that belief is usually what made the business successful in the first place. The confidence is not irrational. The forecast is not dishonest. It is a genuine expression of what the founder sees.
It is also worth acknowledging that sometimes, the future really is the right basis for valuation. Count the number of publicly listed technology businesses whose stock price is substantially higher than their current earnings would justify. What the market is paying for, in those cases, is the expected future earnings, the growth that hasn’t happened yet. If that logic works for listed companies, why not for private IT services businesses?
The answer is evidence. A public company’s growth premium is underwritten by analyst coverage, audited results, market data, and a liquid market of investors pricing the business continuously. A management forecast in an IT services sale process is underwritten by the founder’s belief and a set of assumptions that haven’t been independently tested. These are very different things.
The hockey sticks we see in management presentations are not just in revenue. They appear across every line: revenue growing at rates that haven’t been achieved historically, margins expanding through unspecified efficiencies, cash generation improving as supplier payment terms elongate and customer collection shortens. The optimism is comprehensive, which is part of what makes it so difficult for buyers to credit.
At its worst, a management forecast can look less like a financial projection and more like a fantasy: a vision of the business as the founder wishes it to be rather than as the evidence suggests it will be. Buyers have seen enough of these to develop a healthy scepticism towards any forward-looking number.
But here is the important counterpoint. A forecast that is genuinely grounded in reality, anchored to historical performance, supported by contracted revenue, evidenced pipeline, and demonstrable budgeting accuracy, is not fantasy. It is a credible financial story that buyers can engage with, underwrite, and ultimately pay for. The question is never whether to present a growth case. It is whether you can evidence it.
And the consequences of getting this wrong go further than the growth premium being ignored. An overly optimistic forecast that falls apart under scrutiny does not just lose you credit for future revenue. It undermines your credibility more broadly. A buyer who concludes that your forecasts are fantasy starts to wonder what else in your materials has been presented through an optimistic lens. The damage ripples: into how they view your historical numbers, your customer relationships, your management quality, and ultimately your price. The cost of a hockey stick forecast that cannot be defended is rarely limited to the forecast itself.
The management presentation was impressive. Revenue forecast to grow from £8 million to £14 million over three years. EBITDA margins expanding from 18% to 24%. A hockey stick graph showing confident, steady growth driven by new customer acquisition, product expansion, and operational efficiencies.
The private equity fund listened politely, asked a few questions, and then said something the seller wasn’t expecting.
“That’s helpful context. But to be clear: we won’t be valuing your business based on this forecast. We’ll be valuing it based on your current run rate and what we can independently verify. The forecast is interesting, but it’s not something we’ll pay for.”
The seller was confused and frustrated. He’d spent weeks building that forecast with his team. It was based on genuine opportunities and reasonable assumptions. Why wouldn’t buyers give him credit for the growth he could see so clearly?
Welcome to the reality of IT services M&A.
Why Management Projections Rarely Survive Due Diligence in IT Services M&A
Evolution Capital
Why Buyers Don't Believe Your Forecast
After reviewing hundreds of management projections across 250 transactions in this sector, we can say this with confidence: most management forecasts are optimistic by 30 to 50%. Not because sellers are deliberately dishonest. Because of how forecasts are built.
Forecasts reflect aspiration rather than evidence. They show what founders hope will happen if everything goes right, not what’s likely to happen given historical patterns and realistic execution capability.
Forecasts often assume best-case scenarios. They tend to incorporate positive assumptions: customer wins materialise on schedule, retention stays high, new products launch successfully, competition doesn’t respond. Downside risks get acknowledged and then set aside.
Forecasts often aren’t how sellers actually manage. Internal budgets and operating plans are frequently more conservative than the projections shown to buyers. This disconnect reveals that even sellers don’t fully believe their own numbers.
And buyers have seen dozens of confident three-year plans that bore no resemblance to actual outcomes. Pattern recognition tells them to discount forecasts heavily unless backed by concrete, independently verifiable evidence.
The fundamental problem: forecasts are cheap talk. Saying revenue will grow 25% annually costs nothing. Proving it’s achievable requires evidence that most sellers cannot provide. And when the evidence isn’t there, the cost extends beyond the growth premium being discounted: a buyer who concludes your forecast isn’t credible will start applying the same scepticism to your historical numbers, your customer claims, and everything else in your materials.
- What Matters Most
Key Considerations Before You Sell
01
Protect Your Proceeds
Understand how cash, debt, and working capital adjustments can change the final amount you receive.
02
Know What Buyers Look For
See how FDD teams examine working capital, deferred revenue, DLAs, and other balance sheet items.
03
Prepare Before You Sell
Get your balance sheet in order 12–18 months ahead to reduce surprises, delays, and price adjustments.
Evolution Capital
What Buyers Rely On Instead
Sophisticated buyers don’t value businesses based on what might happen. They value based on what they can verify and what is demonstrably likely to continue.
Evolution Capital
Current run rate revenue
This is the revenue the business would generate over the next twelve months if no new customers are won and existing customers renew at historic rates. It is the baseline. It is provable. It is not dependent on execution of growth plans.
Run rate analysis starts with monthly or annual recurring revenue, adjusts for known customer losses and contract expiries, applies historical churn rates to estimate likely attrition, and excludes non-recurring project revenue unless the pipeline supports similar levels.
A managed services business might report £5 million trailing twelve month revenue. But run-rate analysis reveals £600,000 was non-recurring project revenue, £400,000 came from a customer who has given notice, £300,000 relates to contracts expiring in Q1 with uncertain renewal, and historical churn of 12% suggests a further £480,000 in likely attrition. Realistic run rate: £3.2 million, not £5 million. Buyers value based on £3.2 million, with any growth beyond that requiring proof rather than projection.
Evolution Capital
Order book and contracted revenue
Contracted revenue has low execution risk. It is already committed. It is not dependent on winning new business or customers deciding to buy.
What qualifies: signed contracts with defined values and terms, purchase orders issued and confirmed, framework agreements with minimum commitment levels, and renewals already secured with signed documentation.
What does not qualify: verbal commitments from customers, pipeline opportunities even at “90% probability,” historical renewal patterns, or expected contract expansions.
In IT managed services specifically, the composition of the contracted revenue base matters as much as the total. Annual contracts billed monthly and auto-renewing carry high predictability and are valued accordingly. Multi-year contracts, where a customer has committed to a three or five year term, are even stronger: they represent locked-in revenue with meaningful contractual protection against churn. Hardware refresh cycles and project-based revenue, by contrast, are more episodic: a customer who spent £80,000 on infrastructure last year may not spend anything similar next year, and buyers will want to understand the refresh cycle logic before giving any credit to a projection of repeat hardware revenue.
Customer vertical also matters significantly. Public sector customers often operate on annual procurement cycles tied to government financial years, with contracts awarded through formal tender processes: once won, these tend to be sticky, but they are slow to win and subject to retendering. Financial services and legal clients tend to value reliability and are less price-sensitive, but their requirements around compliance, certifications, and data handling add delivery complexity. SME customers generate individually smaller contracts but, in aggregate, a diverse SME base provides resilience: no single customer departure is catastrophic. Enterprise customers can represent transformative revenue wins, but concentration risk is high and the relationship is often more fragile than it appears, particularly if dependent on a single contact at the customer.
Buyers will want to see contracted revenue broken down by product line, contract type, and customer vertical. The businesses that can present this analysis clearly, showing that recurring managed services revenue is diversified across customer types and contract structures, are far more credible in their forward projections than those presenting a single aggregate number and asking buyers to take their word for its quality.
A seller might claim £1.5 million in “committed new business for next year.” Due diligence reveals £400,000 is actually signed contracts, £600,000 is in final negotiation, £300,000 is “the customer said they’ll definitely buy,” and £200,000 is “similar to what they bought last year.” Buyers give credit for £400,000, not £1.5 million.
Evolution Capital
Historical performance and trend analysis
Past performance is the best available predictor of future performance. If a business has grown 8 to 12% annually for five years, a 25% growth forecast requires extraordinary explanation.
Buyers examine revenue growth trend over three to five years excluding acquisitions, EBITDA margin progression, customer retention patterns by cohort, new customer acquisition rates and average deal sizes, sales productivity and conversion metrics, and contract renewal rates by customer type.
If historical growth has been 8 to 12% annually with stable margins, a forecast showing 25% growth with significant margin expansion will be dismissed. The historical pattern is the baseline. Growth beyond that is speculative until proven.
One dimension of historical performance that is often overlooked but carries significant weight: prior budgeting accuracy. A forecast is, in many ways, just a flashier word for a budget. If you can demonstrate that you have set annual budgets and hit or beaten them consistently over three years, your forward projections become materially more credible. You are not just telling a buyer what you think will happen: you are showing them a track record of being right about what you thought would happen. That is a fundamentally different conversation. Conversely, if internal budgets have been missed by 20 to 30% for three consecutive years, no amount of presentation quality will rescue the credibility of a forward forecast.
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Agreed pricing terms with existing customers
Revenue from existing customers at documented pricing is lower risk than any new customer acquisition. Price escalation clauses in existing contracts, signed amendments for service expansions, and approved proposals for additional services all have genuine credibility.
“We expect to upsell them additional services,” “they’ll probably accept a price increase,” and “we’re in discussions about expanding the relationship” do not count.
A seller forecasts £600,000 revenue growth from existing customer expansion. Due diligence reveals £150,000 comes from signed price escalation clauses, £200,000 from signed service expansion agreements, and £250,000 is “expected upsells based on conversations.” Buyers give credit for £350,000, not £600,000.
Evolution Capital
Sales pipeline backed by detailed evidence
Pipeline is forward-looking and execution-dependent. With proper documentation, qualification, and conversion rates tracked consistently over time, it has some credibility. Without these, it has none.
What makes pipeline credible: named prospects rather than vague sector descriptions, documented contact history and proposal status, clear stage definitions with entry and exit criteria, historical conversion rates tracked over time, documented pricing and scope, and clear decision timelines. The same budgeting accuracy logic applies here: if you can demonstrate that your pipeline conversion rate has been consistently 22 to 28% over three years and your pipeline today is £4 million, a buyer can make a reasonable calculation about near-term revenue with some confidence. If you have no history of tracking conversion rates and are simply asserting that your pipeline converts at 70%, no buyer will credit it. The earlier the pipeline stage, the more conversion history matters: early-stage opportunities are worth almost nothing without a demonstrable track record of turning them into revenue.
Pipeline credibility also varies by product and vertical. A pipeline of managed services renewals from existing customers is fundamentally more credible than a pipeline of new logo wins from a vertical the business has never operated in before. A public sector tender at preferred bidder stage carries genuine weight: the procurement process has effectively pre-qualified you. A verbal indication from an enterprise prospect who has been “very interested” for nine months carries almost none. Breaking pipeline down by product type, customer stage in the buying process, and vertical context allows buyers to apply appropriate probability weightings rather than being left to apply a blanket discount to everything.
What destroys pipeline credibility: vague descriptions, no documented customer contact, unrealistic conversion assumptions of 80% when historical is 25%, every opportunity rated “high probability,” and pipeline that has been “about to close” for six months.
A seller claims £3 million in “qualified pipeline at 70% probability.” Due diligence reveals only £800,000 has named prospects with documented proposals, historical win rate is 22% not 70%, and £1.2 million has been in pipeline for twelve months with no documented progress. Buyers probability-weight the credible portion: £800,000 at 22% is £176,000 of credible near-term revenue. Beyond the revenue impact, a pipeline that dissolves under scrutiny like this signals poor sales process discipline, which raises further questions about the quality of the management team and their ability to deliver any of the growth assumptions in the forecast.
“Enterprise Value gets the headlines. Your balance sheet determines what you actually receive.”
Evolution Capital
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New product traction with real customer adoption
New product forecasts are notoriously optimistic. But if a product has launched, gained multiple customers, and demonstrated repeatable sales with documented pricing and margin, it has earned some credibility.
What buyers need to see: the product is generating revenue, not still in development; multiple customers have adopted it beyond beta testing; clear pricing and margin profile are established; the sales process is documented and repeatable; and customers are renewing rather than churning after initial adoption.
A seller forecasts £1.8 million from a new cloud migration service. Due diligence reveals the service launched eighteen months ago, six customers have adopted it generating £320,000 annual recurring revenue, and the sales cycle averages four months requiring two senior consultants. At realistic sales capacity of four to five new customers per year, the credible growth is £250,000 to £300,000 annually, not £1.8 million in year one.
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How FDD Teams Validate or Dismiss Forecasts
Bottom-up revenue build
FDD teams reconstruct forecasts from constituent parts, starting with verified run rate, adding only contracted growth, probability-weighting pipeline using historical win rates rather than management assumptions, adding existing customer expansion only where pricing and scope are documented, and adding new product revenue only where adoption is proven and sales capacity exists.
This analysis almost always produces lower revenue than management forecasts. The gap between the bottom-up build and the management projection reveals the extent of wishful thinking versus evidence-based planning.
Margin bridge analysis
Forecast margin expansion receives particular scrutiny. For each forecast year, a margin bridge traces starting margin through volume impact, cost inflation for wages and suppliers, efficiency gains only where specifically quantified with supporting evidence, investment requirements for headcount and systems, and resulting ending margin.
Most management forecasts show margins expanding through vague “efficiency gains” and “economies of scale” while ignoring the investment requirements that growth actually demands. Margin bridge analysis typically shows margins staying flat or compressing during growth periods, the opposite of what most management forecasts project.
Scenario analysis
FDD teams test forecasts under downside scenarios: customer churn at 15% instead of the assumed 8%, new customer wins at 60% of plan, project revenue 30% lower. A credible forecast holds up under reasonable stress. An aggressive forecast collapses completely in downside scenarios, revealing there is no margin for error built in.
Benchmarking against peer performance
Forecast performance is compared to comparable companies on revenue growth rates, margin profiles, customer acquisition costs, retention metrics, and productivity. If a forecast shows performance at the 90th percentile of peer companies without clear explanation of specific competitive advantages, it gets discounted heavily.
Management track record
Have you historically delivered on forecasts, or consistently missed?
If you’ve met or beaten your last three annual budgets, credibility increases significantly: not just for the forecast, but for management quality more broadly. If you’ve missed by 20 to 30% for three consecutive years, buyers will ignore your current forecast entirely. If you don’t formally budget at all, buyers assume forecasting is not a core competence and discount projections accordingly. In either of the latter cases, the damage is not confined to the growth premium: it extends to how buyers assess the reliability of management and the quality of the business being run.
Evolution Capital
No growth premium without evidence. If historical growth is 10% and you’re forecasting 25%, you get valued on the 10% historical pattern. If you actually deliver 25%, the buyer benefits. You don’t get paid for it upfront.
Contracted revenue counts, pipeline doesn’t. That £1 million in “high-probability pipeline” is worth zero in the valuation calculation. But if you convert it to contracted revenue before completion, it counts immediately. This creates a powerful incentive: the six to twelve months before going to market should focus on converting pipeline to signed contracts, not on building more impressive forecasts.
Run rate trumps trailing twelve months. Buyers care more about current run rate than historical totals. If trailing twelve month revenue is £8 million but run rate after adjustments is £6.5 million, you are valued on £6.5 million. This is particularly painful for businesses with declining performance or one-off project spikes that will not recur.
Forecast risk gets shifted to earnouts. When a valuation gap exists because the seller wants £15 million based on forecast and the buyer will pay £11 million based on run rate, earnouts bridge the difference. “We’ll pay 8x on current EBITDA upfront. If you hit your forecast, you earn additional consideration.” This shifts all forecast risk to the seller. As discussed in the previous article in this series, earnouts rarely pay out in full.
The Commercial Impact: Valuation Based on Facts
Evolution Capital
If you want buyers to give any meaningful credit for growth, you need evidence, not projections.
Convert pipeline to contracted revenue. In the six to twelve months before going to market, focus on getting proposals signed, converting verbal commitments to written agreements, securing renewals early with signed documentation, and finalising pricing for service expansions. Every pound of pipeline converted to contracted revenue before diligence dramatically strengthens your position.
Document everything. Vague claims get discounted to zero. Detailed documentation gets consideration. Sales pipeline with named prospects, documented proposal status, and decision timelines. Customer expansion plans with documented discussions and proposals. Price escalation clauses in contracts. New product adoption metrics and customer case studies. Historical conversion rates and sales productivity data.
Demonstrate historical execution. Show three years of meeting or beating budgets. Demonstrate that you’ve successfully launched and scaled products before. Provide evidence of systematic sales processes that deliver predictable results.
Be conservative. Ironically, conservative forecasts often drive higher valuations than aggressive ones. A conservative forecast that says “we’ll grow 12 to 15% annually based on existing customer expansion and historical new customer acquisition, with detailed support” gets the response: “This is credible. If they execute even modestly better, there’s upside.” The result is a premium multiple on current run rate because downside risk appears limited.
An aggressive forecast gets the response: “We don’t believe this. We’ll value on current run rate with no growth premium.” Lower multiple.
Separate your operating plan from your growth vision. Present two distinct cases. The base case operating plan: what the business will deliver with current capabilities and customers, conservative, highly achievable, with detailed support. And the growth vision: what’s possible with investment, new products, and market expansion, clearly separated. Buyers value the base case. The growth vision shapes strategic thinking without driving purchase price. This separation creates credibility because you’re not claiming aggressive growth is guaranteed.
Make your data work for the right buyer, not just any buyer. Clean, well-organised customer and revenue data does something beyond satisfying FDD requirements: it allows a buyer to identify the white space. A trade buyer who sees your customer base laid out by sector, size, and service penetration can immediately spot where their own products or services could be cross-sold. A strategic acquirer can model cost synergies from overlapping supplier relationships or shared infrastructure. These buyers will pay a premium to win the deal over a financial buyer who cannot achieve the same outcomes. Your data can be the thing that unlocks a materially higher price from the right buyer, not just because it reduces their risk, but because it helps them see what they are buying into.
How to Build Credibility for Growth
“The balance sheet isn’t just an accounting document it’s the financial settlement mechanism of every successful transaction.”
Evolution Capital
The most common mistake founders make in preparing for sale is investing heavily in building impressive forecasts rather than in the activities that actually create valuation.
EC Analytics (Virtual CFO / CFO Assist)
The inputs that create a credible growth story, consistent management accounts over multiple years, systematic pipeline tracking with documented conversion rates, customer-level revenue analysis, formal budgeting and forecasting processes, and the track record of budgeting accuracy that gives forward projections genuine credibility, don’t exist in most founder-led IT services businesses. EC Analytics builds these in the twelve to twenty-four months before going to market, so that by the time you engage buyers you have a track record to support your narrative rather than asking them to take your word for it.
We structure information memoranda around what can be independently verified, not what the seller hopes buyers will believe. We know where the credibility thresholds are, and we position businesses to land on the right side of them. We also identify the right buyers: the acquirers who can see and pay for genuine synergies and white space in your customer base, rather than those who simply apply a standard multiple to normalised EBITDA.
When we review businesses for buyers, quality of earnings and revenue sustainability analysis is where most of our time is spent. We know exactly how management forecasts get tested, where the gaps appear, and what makes a forward projection survive scrutiny versus collapse under it. When we work with sellers preparing for market, that experience means we can tell you precisely where your numbers will be challenged and help you build the evidence to support them before anyone asks.
The businesses that command premium multiples in IT services M&A are not always those with the most impressive growth stories. They are those whose growth stories are backed by the evidence to support them
How Evolution Capital Can Help
- Our Blog
Related Articles
What is the EV to equity value bridge in an IT services acquisition?
Enterprise Value is the agreed value of the business before accounting for its financial position. Equity value, what you actually receive at completion, is derived by adjusting EV through the net cash and debt schedule, which adds cash and deducts financial debt and debt-like items, and the working capital adjustment, which is positive if completion working capital is above the agreed peg and negative if below. Understanding this bridge before going to market is essential: the adjustments frequently move the headline number by £500,000 to £2 million or more.
What is an SPA and why does it matter for balance sheet purposes?
The Sale and Purchase Agreement is the binding legal contract governing the transaction. It defines the purchase price mechanics, including how the balance sheet feeds into the final price through either completion accounts or a locked box structure, what items are treated as cash, debt, or debt-like, and the working capital peg. The SPA is where the balance sheet stops being an accounting document and becomes a financial settlement mechanism. Understanding its terms before signing is essential.
What is the difference between completion accounts and locked box?
Completion accounts is the standard structure in the UK mid-market IT services space: the price is estimated at signing and adjusted post-completion based on the actual balance sheet, with a reconciliation process typically taking 30 to 90 days after the deal closes. Locked box fixes the price based on a historical balance sheet, with no post-completion adjustment. Locked box provides price certainty but requires a very clean historical balance sheet and is rarely seen at the lower to mid end of the UK market.
Why is deferred revenue so important in IT services M&A?
Deferred revenue represents cash received for services not yet delivered and is a liability on the balance sheet. For IT services businesses with annual or multi-year contracts billed upfront, and particularly those serving customers who time spend around financial year-ends or seasonal cycles, it can be a very material number. Businesses not on accrual accounting often carry no deferred revenue on their balance sheet at all, meaning it overstates the net asset position. Buyers always restate, and the adjustment comes off your proceeds.
What is a Section 455 charge and how does it arise from a director's loan account?
If a director owes the company money through a DLA and it is not repaid within nine months of the company’s accounting year-end, the company faces a Section 455 tax charge of 33.75% of the outstanding balance. This is repayable by HMRC once the loan is repaid, but it represents a real cash cost at the point of a deal, treated as a debt-like item deducted from proceeds. A £150,000 outstanding DLA creates a £50,625 s.455 charge on top of the loan balance itself.
Do I need a consolidated balance sheet if I operate through multiple legal entities?
Yes. Buyers always look at the consolidated position across all entities in the group. Holding company balance sheets that haven’t been updated for months or years are one of the most common sources of unwelcome surprises in IT services diligence. Get the consolidated position clear and current well before going to market, and identify which entities are in and out of the transaction perimeter early in the process.
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