Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Small Electrical Contractor Hit 17x EBITDA with Annual Service Contracts
Transcript
- Lucas: So there's a small electrical contracting business in suburban Ohio — 14 employees, about $2.3 million in trailing revenue — and it just sold for 17 times EBITDA. That's roughly 50 percent above the typical multiple for a trade-services firm. Luna: Seventeen times for an electrical contractor? That sounds like a software company multiple. Lucas: It does. And when I first saw the deal sheet I thought there had to be a catch. But the buyer — a regional private-equity shop focused on commercial services — was actually pretty clear about why they paid up. They said the business had something most contractors don't: real recurring revenue. Luna: But electrical work is project-based by nature. You wire a new building, you do a service call, you fix a panel — that's not a subscription. Where's the recurring piece? Lucas: That's exactly what I asked the broker. Turns out, roughly 68 percent of the revenue came from annual preventative-maintenance contracts with commercial property managers. Think about it — office buildings, apartment complexes, retail strip centers. They all need periodic electrical inspections, panel testing, thermal imaging. This owner built a program where he'd visit each property four times a year, do a standard checklist, replace consumables, and flag any issues. Luna: So the property managers were essentially paying a flat annual fee for predictable service visits. Lucas: Exactly. And the contracts auto-renewed unless cancelled with 60 days' notice. The owner started signing these about seven years ago — just went to every property manager he knew and offered a fixed-price annual plan that was cheaper than calling him per incident. Once he had 15 contracts, the cash flow became predictable enough that he could hire a dedicated technician just for those routes. That freed him up to sell more. Luna: And I'm guessing the margins on those visits were higher than on one-off calls. Lucas: Much higher. The broker shared the P&L breakdown. The contract work carried about a 42 percent EBITDA margin. The project work — new construction, tenant fit-outs — ran closer to 18 percent. So the recurring revenue was literally more than twice as profitable. And it was stickier. The owner had a 93 percent retention rate over the last five years. Luna: Okay, so the numbers make sense. But how did he get those contracts in the first place without a sales team? Fourteen employees — that's not a big operation. Lucas: He did it personally. He walked into every commercial property management office within a 30-mile radius. His pitch was simple: 'You spend $8,000 a year on emergency calls for blown breakers and tripped panels. I'll charge you $6,000 for four scheduled visits, and if anything breaks between visits, I'll be there within four hours at no additional labor cost.' Most managers signed because it turned a variable cost into a fixed cost. That's a classic business to business procurement preference. Luna: And the property managers — they get budget certainty. Their bosses love that. Lucas: Exactly. And once the owner had 40 contracts, he had enough revenue to hire a service manager, which let him step back and focus entirely on acquisition. By year seven, he had 112 contracts. That's roughly $1.6 million in recurring revenue. Luna: So the private-equity buyer — they're essentially buying a contracted cash-flow stream with a built-in renewal mechanism. That's worth a lot more to them than a book of one-off projects. Lucas: That's the whole thesis. The buyer told the broker they typically value recurring-service businesses at 15 to 20 times EBITDA, whereas they'd pay 8 to 10 for a project-based contractor. So the premium was entirely driven by revenue mix. But here's the rub — the buyer also insisted on an earn-out because they wanted to make sure the contracts stuck after the owner left. Luna: I was going to ask about that. The relationships were with the owner personally. What happens when he's gone? Lucas: The earn-out structure was three years, with 60 percent of the earn-out tied to contract retention and 40 percent tied to contract growth. If retention stayed above 85 percent and the buyer added 10 new contracts each year, the owner got an extra $400,000 on top of the base purchase price. That's a pretty standard way to bridge the goodwill gap. Luna: So the owner had incentive to introduce the buyer's team to the property managers and make sure the hand-off was smooth. Lucas: Right. And he did — he spent his first six months post-close basically doing ride-alongs with the buyer's account managers, introducing them at each property, handing over the relationship. By month seven, the property managers were calling the new team directly. Retention after year one was 91 percent — good enough to hit the earn-out threshold. Luna: That's impressive. But I wonder — how replicable is this? Can any electrical contractor, or plumber or HVAC company, just go out and build a block of annual contracts? Lucas: I think the key variable is the relationship with commercial property managers. If you're a residential-only contractor, it's harder because homeowners don't want annual contracts for electrical work — they call when something breaks. But any contractor who already does work for commercial landlords can absolutely start selling annual plans. The owner in this case had zero contracts when he started. He just made the decision to shift his focus. Luna: And the margins are better, the valuation is better, and the exit is smoother. Seems like a no-brainer. Lucas: It does. But it took discipline. For the first two years, he was turning down profitable one-off jobs because he was spending his time pitching contracts. His revenue actually dipped slightly in year two. But by year three, the contracts had built enough volume to more than compensate. Luna: So there's a short-term pain for long-term gain. If someone listening runs a trades business and is thinking about an exit in three to five years, this is probably the single most actionable thing they can do. Lucas: Absolutely. And it doesn't require fancy software or a sales team. It just requires a good list of property managers, a simple pricing sheet, and the willingness to walk into 100 offices. The owner in this case said he got rejected 34 times before he signed his first contract. Luna: Thirty-four rejections. That's persistence. Lucas: And now he's sitting on a 17-times exit. If today's conversation moved your work forward in any small way — maybe gave you an idea for how to structure your own recurring revenue or how to think about an earn-out — the way we keep these episodes ad-free and listener-supported is through people like you. If it's useful, buy me a coffee dot com slash fexingo. That's all. No pressure, just an option to keep the conversation going. Luna: Yeah, we really appreciate it. It lets us keep digging into these real-world deals without any sponsor interference. Lucas: So, back to the Ohio contractor — one more interesting detail. The broker told me that the buyer's due diligence team spent an unusual amount of time verifying the auto-renewal language in the contracts. They wanted to make sure that renewal wasn't optional on the property manager's side. And it turned out that 60 of the 112 contracts had what's called 'evergreen' clauses — they renew automatically unless the client gives written notice. That was a huge plus in valuation. Luna: So if you're building contracts, make sure they auto-renew. That's a concrete takeaway. Lucas: Exactly. And the owner had a simple spreadsheet tracking renewal dates. No CRM. Nothing fancy. The buyer was actually relieved that the contracts were easy to audit — it reduced their risk. They told the broker that clean contract documentation was worth an extra half-turn on the multiple. Luna: Half a turn — on a 17-times deal, that's significant. So documentation matters, even for a small business. Lucas: It does. And I think that's the broader lesson. You don't need to be a big company to command a premium multiple. You need predictable, recurring, high-margin revenue that's cleanly documented. That's what gets private equity excited. And if you can build that over a few years, your exit could look a lot like this one.