If you ask 100 founders of B2B technology firms what business they are in, 80 of them will say "Managed Services." If you look at their P&L, only 20 actually are. The rest are Professional Services (PS) firms disguised in a trench coat of monthly invoices.
This isn't just a semantic argument; it is a multimillion-dollar valuation error. In 2025, the market made its preference brutally clear. True Managed Service Providers (MSPs) with high-quality recurring revenue traded at 8x to 12x EBITDA. Traditional project-based Professional Services firms struggled to break 4x to 6x EBITDA.
For a founder doing $2M in EBITDA, that is the difference between a $10M exit and a $24M exit. The check is smaller, the earnout is longer, and the due diligence is more painful.
The confusion stems from billing models. Many founders believe that if they charge a monthly retainer, they are an MSP. They are wrong. If your monthly fee simply buys a bucket of hours for your team to do custom work, you have not built a managed service; you have built subscription labor.
Investors do not pay premiums for subscription labor because it doesn't scale. It suffers from the same unit economics as project work: to double revenue, you must roughly double headcount. True managed services decouple revenue from hours. They rely on IP, automation, and standardization to deliver outcomes, not effort.
If you are Scaling Sarah—stuck at $15M revenue and wondering why your "recurring" revenue isn't generating the valuation premiums you read about—it is likely because your unit economics betray your true business model. You are running a consultancy on a layaway plan.
To understand why private equity values these models differently, we must look at the margin profile. The 2025 benchmarks paint a stark picture of the efficiency differences between best-in-class MSPs and average PS firms.
According to 2025 data from Service Leadership and SPI Research, the margin profiles have diverged significantly:
The gap exists because PS margins are capped by utilization. As we noted in our analysis of MSP profit gaps, a human being can only be billable 2,080 hours a year (and realistically, only about 75% of that). An MSP's automated patch management script, however, can service 10,000 endpoints as easily as 100.
The most alarming statistic from 2024-2025 reporting is the collapse of PS profitability. While top-tier MSPs maintained adjusted EBITDA margins above 19%, professional services firms saw average EBITDA margins plummet to 9.8%—a five-year low. Rising labor costs and falling utilization (dropping to 68.9%) have squeezed the traditional consulting model.
This margin divergence drives the valuation multiple. Acquirers buy future cash flow. In a PS firm, that cash flow walks out the door every evening. In an MSP, the cash flow is locked in via contracts and high switching costs.
Crucially, quality of revenue matters more than quantity. A $20M firm with $10M of project revenue and $10M of messy, low-margin "retainer" revenue will trade closer to the PS multiple. Buyers discount "recurring" revenue that requires high-touch delivery.
You cannot simply decide to be an MSP tomorrow. However, you can engineer your revenue mix to capture the valuation gap. This process is called "Productization of Service."
Stop selling hours. Identify the one problem you solve repeatedly (e.g., "We fix broken cloud migrations" or "We manage cybersecurity compliance"). Document the process until it is a rigid Standard Operating Procedure (SOP). If it's documented, it's transferable. If it's transferable, it's scalable.
Change your contracts. Instead of "20 hours of support per month," sell "99.9% Uptime Guarantee" or "Continuous Compliance Monitoring." The moment you decouple the fee from the hours worked, you create an incentive for efficiency. Every hour you don't spend delivering the outcome is pure margin expansion.
Set a hard rule for your sales team: for every $3 of project revenue, we must sell $1 of recurring revenue. Use your project work (which has lower valuation but high cash flow) to fund the acquisition of recurring revenue. Do not let your sales team feast on "easy" project kills that add zero enterprise value.
The market is telling you exactly what it values. It does not value your heroism, your late nights, or your ability to customize everything for every client. It values systems, predictability, and leverage. You can continue to run a high-quality Professional Services firm—it is a noble profession—but do not expect an MSP exit check when you get there.
