Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Security Company Tripled Its Multiple by Adding Contracts
Transcript
- Lucas: If you run a service business — security, janitorial, staffing, maintenance — there's probably a question that keeps you up at night: how do I get a buyer to pay more than a commodity multiple? Because that's the trap. Service businesses often trade at 4 to 6 times EBITDA, sometimes less. Luna: Right — buyers look at hourly billing and think, 'This is just a labor arbitrage. Low barrier to entry, high churn.' Lucas: Exactly. So today's episode is about a regional security guard company — let's call it Sentinel Protection — that sold for 11 times EBITDA. Nearly double what you'd expect. And the lever wasn't some tech innovation or fancy software. It was contract structure. Luna: Meaning they shifted from month to month billing to multi-year agreements? Lucas: More than that. They transformed their revenue mix. Before the turnaround, about 70 percent of Sentinel's revenue came from hourly guard services billed monthly — essentially at-will. Clients could cancel with 30 days' notice. The remaining 30 percent came from short-term event security, which is even less predictable. Luna: So basically all their revenue was sticky for maybe 30 days. Lucas: Exactly. The owner, a guy named Mark, wanted to retire in three years. He brought in a part-time CFO who had sold a business before. The CFO's first question was: 'Who are your five best clients, and would they sign a three-year contract if you locked in pricing?' Luna: And did they? That's a big ask — especially on price, since inflation was running hot in 2023 and 2024. Lucas: They didn't lock in a flat rate. They offered a floor and a ceiling — annual price escalators tied to the local minimum wage plus 2 percent. So the client got predictability, and Sentinel got guaranteed revenue. Within 18 months, they converted their top 8 clients — about 35 percent of revenue — to three-year contracts with auto-renewal clauses. Luna: So now a buyer looks at this business and sees $4 million in locked-in revenue per year. That changes the risk profile completely. Lucas: Changes the financing too. Banks will lend against contracted revenue at a higher advance rate. A strategic buyer — in this case, a large facility services company — could justify paying more because they could bolt Sentinel onto their existing client base and cross-sell. Luna: Walk me through the math. What was the actual sale price? Lucas: Sentinel was doing about $11 million in revenue with EBITDA of roughly $1.8 million. At a typical service business multiple of 5.5 times, that's about $9.9 million. But they sold for 11 times — just shy of $20 million. Luna: So the contracts alone added over $10 million to the valuation. Lucas: Yes. And here's the detail I love: the buyer didn't even care about the contracted revenue from a cash flow standpoint as much as they cared about the visibility. They were a publicly traded company — they report to analysts every quarter. Having multi-year contracts meant they could forecast accurately. That predictability is worth a premium in M&A. Luna: So it's not just about the dollar amount — it's about reducing uncertainty for the buyer's own planning. Lucas: Right. And the CFO also staggered the contract expirations. So every year, only two or three contracts come up for renewal, never all at once. That protects the multiple even after the sale. Luna: Were there any other changes they made to the business that helped? Lucas: A few smaller ones. They centralized scheduling software so the buyer could see real-time labor utilization. They also standardized uniforms and equipment across all sites — sounds trivial, but it made the due diligence smoother because there were no surprise costs. But the contracts were the main event. Luna: I think a lot of service business owners hear this and think, 'My clients would never sign a multi-year deal.' But if you give them something — price protection, priority service, a dedicated account manager — it's often negotiable. Lucas: Exactly. Mark's CFO started with the five biggest clients, offered annual meetings and a 24-hour response guarantee. Three out of five signed immediately. The other two came around after six months when they saw the service improve. Luna: And the beauty is, once you have those contracts, you don't need to convert 100 percent of your revenue. Even 30 percent can lift your multiple by two or three turns. Lucas: That's the key takeaway. You don't need to become a SaaS company. You just need to give a buyer a reason to believe the revenue will still be there next year. A contract is the cheapest way to prove that. Luna: It's interesting — we talk a lot on this show about cleaning up financials or fixing operations, but this is really about changing how the buyer perceives risk. Lucas: Yeah. And it's something any owner can start doing today. Even if you're not selling for five years, building a book of contracted revenue now means that when you do go to market, you have a track record. Buyers love to see renewals over time. Luna: So if you're listening and you run a service business, maybe start with your best client this week. Lucas: And if today's episode gave you something concrete to think about, that's exactly why we do this. These conversations stay ad-free because of listener support. If you found it useful, you can help keep it going at buy me a coffee dot com slash fexingo. Luna: It's a small way to say 'this mattered.' We appreciate it. Lucas: So back to Sentinel — after the sale, Mark stayed on for a year as a consultant. The buyer kept all the contracts intact and actually added two more in the first six months. The business is still running under the same name, just with deeper resources. Luna: And that's the ideal outcome. Owner gets paid, employees keep their jobs, clients keep their service. Lucas: Right. And it all started with a conversation about a contract. Next episode, we're going to look at the flip side — a business that lost a buyer at the finish line because of a single customer concentration issue. You'll want to hear that one.