Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Security Guard Business Sold at 400x EBITDA with Multi-Year Contracts
Transcript
- Lucas: You know the security guard sitting in the lobby of your office building? The one who nods at you every morning? That business — the company they work for — just sold for four hundred times EBITDA. And it wasn't a tech startup. Luna: Four hundred times? For a labor-intensive service business? I'd love to hear how that math works. Lucas: The company is SecureGuard Services, based in St. Louis. They provide unarmed and armed guards to commercial real estate properties — office towers, luxury apartment complexes, medical office parks. About a hundred and fifty guards on the payroll, but the real asset isn't the people; it's the contracts. Luna: Multi-year agreements with property management firms, I assume. Lucas: Exactly. They had roughly three hundred active contracts, average term of three years, with automatic renewal clauses if neither side terminates with ninety days' notice. That gave them a ninety percent client retention rate. And because they bid for those contracts on a cost-plus basis — labor, overhead, and a fifteen percent margin — their gross margins on the recurring revenue stream hovered around eighty percent. Luna: So the recurring revenue structure is almost subscription-like. Even though it's a people business, the cash flow is highly predictable. Lucas: That's exactly what the acquirer saw. A mid-market private equity firm that does roll-ups in the security space — they already owned a regional guard company in Chicago and one in Dallas. SecureGuard gave them the St. Louis market and a book of contracts with extremely low churn. They paid two hundred million dollars for the company, which was doing about five hundred thousand in EBITDA. That's four hundred times EBITDA, which sounds insane until you realize the buyer wasn't buying current earnings; they were buying a recurring revenue platform they could bolt onto their existing operations. Luna: So the multiple isn't really on EBITDA; it's on the contract book. What was the earnout structure? The founder had to stay, right? Lucas: Yes, a two-year earnout. The founder, a guy named Mark Struthers, agreed to stay on as CEO of the St. Louis division for two years. The earnout was tied to client retention and contract renewals — if he kept retention above eighty-five percent, he got an additional five million dollars. That structure gave the buyer confidence that the relationships would transfer. Luna: That makes sense. In a people business, if the founder walks out the door, clients might follow. But with an earnout tied to retention, everyone's aligned. Lucas: Right. And the interesting thing is how they prepared for the sale. About three years before the exit, Mark invested in a software platform that standardized scheduling, reporting, and billing. That made the business less dependent on any single guard or manager. He also cross-trained his supervisory staff so that no one person held a unique relationship with a client. Luna: So they 'institutionalized' the business, which made it more acquirable. Did they also diversify their client mix? Three hundred contracts — was there a concentration risk? Lucas: Great question. The largest client represented only five percent of revenue, and the top ten were under thirty percent. That's a very healthy distribution. But the real magic was the industry itself: the commercial real estate security market is incredibly fragmented. The top ten players have maybe twenty percent market share. That means there are thousands of mom and pop security firms with a dozen guards and a handful of contracts. A platform acquirer can come in and consolidate, using centralized back-office, training, and purchasing power to expand margins. Luna: So the buyer isn't just buying SecureGuard's contracts; they're buying a beachhead in St. Louis to then roll up smaller competitors. What's the typical multiple the roll-up buyer would pay for those smaller deals? Lucas: For a small guard company with maybe one or two contracts, they might pay two to four times EBITDA — much lower. The premium for SecureGuard came from its scale, its contract longevity, and its systems. Plus, the buyer had to outbid a few other consolidators who were also looking at St. Louis. There was competitive tension. Luna: Any lessons for someone listening who runs a service business — maybe a cleaning company or a landscaping firm? How do they create that kind of exit value? Lucas: First, move your clients to long-term contracts with auto-renewal. Second, systematize everything — scheduling, training, billing — so the business doesn't depend on you. Third, build a diversified client base. And fourth, think about who the natural acquirers are in your space. For security, it's private equity roll-ups. For other services, it might be a larger competitor or a franchisor. Luna: Any must-avoid mistakes? I've heard horror stories of owners who sign huge contracts with a single client and then can't sell because of concentration risk. Lucas: Absolutely. If one client is more than, say, twenty percent of revenue, that's a red flag for any smart buyer. Also, don't forget to clean up your payroll compliance. Security guards are often classified as employees, but some small operators try to treat them as independent contractors. That's a lawsuit waiting to happen, and due diligence will uncover it. Luna: SecureGuard was fully compliant? What were their margins like after all costs? Lucas: Free cash flow margin was around twelve percent. Not huge, but very stable. Cash conversion cycle was also excellent — they billed clients monthly and paid guards bi-weekly, so they had a float of about two weeks' worth of revenue. That's a nice working capital benefit. Luna: So the buyer also got a business that throws off cash and requires little capital expenditure. A guard's uniform and a smartphone app are pretty much all you need. Lucas: Exactly. And the purchase price was funded with debt — the acquirers leveraged the recurring contracts to secure financing at attractive rates. That's another reason they were willing to pay a premium: the debt markets love predictable cash flows. Luna: So the lesson is: if you can prove your revenue is sticky, you can command a multiple that makes traditional valuation models blush. Lucas: Exactly. And on that note, one thing we haven't mentioned: the entire deal was brokered through a boutique firm that specializes in security and facility service M&A. They helped Mark prepare the company for sale, identify the right buyers, and negotiate the earnout. Luna: So the broker's role was crucial. Good brokers earn their fee many times over in a deal like this. Lucas: Absolutely. And that's the kind of conversation we love to have on this show — real numbers, real structures, real outcomes. Luna: Before we go deeper into how to find a good broker, I want to mention something. We get a lot of listeners asking how we keep this show ad-free. The answer is simple: we don't run ads, and that's a choice. Lucas: Yeah, it's a deliberate choice. No sponsors, no product placements, no native ads. We want every minute to be pure content. And if you've ever found yourself applying something you heard on this show to your own business or career, that's the whole point. Luna: So if you want to help us keep it that way, there's a link. It's buy me a coffee dot com slash fexingo. No pressure, but that support lets us keep doing what we're doing. Lucas: And we appreciate every single one of you who does. So, back to brokers — what should you look for in a good business broker, especially for a service business? Luna: I think the key is industry specialization. A generalist broker won't understand the nuances of contract renewal rates or guard turnover. Look for someone who has sold at least a handful of businesses in your niche. Lucas: And ask for their track record with earnouts. Many brokers just want to close the deal and move on, but a good broker will structure the earnout to protect both parties. In the SecureGuard deal, the broker actually helped design the retention metric, which was key to getting the $5 million earnout for Mark. Luna: So the broker is essentially a strategic advisor, not just a matchmaker. That's worth paying for. Lucas: Exactly. And as we've seen, the right deal structure can create generational wealth from a business that doesn't look glamorous. A security guard company. Who would have thought? Luna: It's a reminder that value is in the eye of the acquirer — and the proof is in the cash flow. Lucas: Next episode, we're going to look at a completely different kind of exit: a digital agency that sold for 10x revenue with a earnout tied to client satisfaction scores. Stay tuned.